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How Do Households Respond to Income Shocks?
We use panel data from the Italian Survey of Household Income and Wealth from 1991 to 2016 to document empirically what components of the household budget constraint change in response to shocks to household labor income, both over shorter and over longer horizons. We show that shocks to labor income are associated with negligible changes in transfers and non-labor income components, modest changes in consumption expenditures, and large changes in wealth. We then split the sample in households which do not own business or real estate wealth, and households who do. For the first group, we find ...
Working Paper
Breaking the “Iron Rice Bowl” and Precautionary Swings: Evidence from Chinese State-Owned Enterprises Reform
We use China?s large-scale reform of state-owned enterprises (SOE) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary savings for wealth accumulation. Before the reform, SOE workers enjoyed the same job security as government employees. After the reform, a cumulative of over 35 million SOE workers have been laid off, although government employees kept their ?iron rice bowl.? The change in unemployment risks for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty ...
Working Paper
What we don’t know doesn’t hurt us: rational inattention and the permanent income hypothesis in general equilibrium
This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003,2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that,under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete ...