@article{DeNardietal2020,
  title = {Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare},
  author = {De Nardi, Mariacristina and Fella, Giulio and {Paz-Pardo}, Gonzalo},
  year = {2020},
  month = apr,
  journal = {Journal of the European Economic Association},
  volume = {18},
  number = {2},
  pages = {890--926},
  doi = {10.1093/jeea/jvz010},
  url = {https://doi.org/10.1093/jeea/jvz010},
  abstract = {Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative and survey data. We estimate two alternative processes for household after-tax earnings and study their implications using a standard life-cycle model. Both processes feature a persistent and a transitory component, but although the first one is the canonical linear process with stationary shocks, the second one has substantially richer earnings dynamics, allowing for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age. Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. The richer earnings process implies lower welfare costs of earnings risk.},
  keywords = {Determinants of Wealth and Wealth Inequality}
}

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