Asymmetric consumption effects of transitory income shocks

We use the responses of a representative sample of Dutch households to survey questions that ask how much their consumption would change in response to unexpected, transitory income shocks (positive or negative). The questionnaire also distinguishes between relatively small income changes (a one-month increase or drop in income), and relatively larger ones (equal to three-months' income). The results are broadly in line with models of intertemporal choice with precautionary saving, borrowing constraints and finite horizons

Endogenous Growth, the Distribution of Wealth, and Optimal Policy under Incomplete Markets and Idiosyncratic Risk

Clemens C, Heinemann M. Endogenous Growth, the Distribution of Wealth, and Optimal Policy under Incomplete Markets and Idiosyncratic Risk. Working Papers in Economics and Management. Vol 01-2012. Bielefeld: Bielefeld University, Department of Business Administration and Economics; 2012.This paper combines the Aiyagari/Huggett-type standard incomplete markets model with the Arrow/Romer approach to growth to analyze feedback effects between growth and inequality, both endogenously determined in equilibrium. We derive conditions on existence/ nonexistence of balanced growth paths. Major results include that growth, inequality, and risk are positively related in our model, but we also identify a hump-shaped relationship between welfare and risk, indicating a tradeoff relationship between risk-pooling and growth in the determination of welfare. We discuss transitory dynamics and policy implications. A growth policy simultaneously reduces wealth inequality in the economy. The benefits and burdens of the underlying policy are unequally distributed, which raises the issue of politico-economic equilibria. We provide results on majority voting, finding that that the median voter prefers less than optimal subsidies on investment. Interestingly, the society might even vote against a policy providing full insurance against idiosyncratic risk, because welfare losses of lower growth more than offset welfare gains from lower risk