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Essays on Income Risk, Portfolio Choices and the Macroeconomy
Stockholm University, Faculty of Social Sciences, Department of Economics. Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2023 (English)Doctoral thesis, monograph (Other academic)
Abstract [en]

Business cycle asymmetry of earnings pass-through

How does the firm's role as an insurance provider vary over the business cycle? Using Swedish administrative data, I document that idiosyncratic firm productivity shocks are passed through workers' earnings asymmetrically. In non-recessions, firms are good insurers against negative shocks. In downturns, they pass through a larger share of their shock. Regardless of the state of the economy, instead, positive shocks are mainly passed through when sizeable. I rationalize these findings using a directed search model of the labor market with recursive contracts. Moral hazard risk associated with on-the-job search is key to generating pass-through and the increased risk of firm disaster in recessions is necessary for matching the empirical facts. As the wage growth distribution features procyclical skewness and acyclical variance, the model also suggests a new mechanism for explaining trends in income risk variation over the business cycle. Welfare calculations reveal that workers would be willing to give up a non-negligible share of consumption to avoid this source of uncertainty.

Inferring income properties from portfolio choices

Two main views exist on the nature of the labor income process: according to one, income shocks are very persistent and agents face similar life-cycle profiles - Restricted Income Profiles (RIP); according to the other, income shocks are not very persistent and life-cycle profiles are individual-specific - Heterogeneous Income Profiles (HIP). This paper studies the implications of these two views in a portfolio choice model in order to discover identification restrictions allowing to discern between them. I find that HIP and RIP imply different life-cycle patterns of the participation and conditional risky share choices but similar patterns of consumption and saving. Crucial for this result is the inclusion of cyclical skewness in the stochastic process for income, which enables us to correctly estimate the part of income risk deriving from the persistence of the shocks.

Preference heterogeneity and portfolio choices over the wealth distribution

What are the key elements required in generating portfolio choices over the wealth distribution in line with the data? In this paper, we argue that capturing preference heterogeneity across individuals is one of them. Using a partial equilibrium Bewley-type model with endogenous portfolio choice and cyclical skewness in labor income shocks, we show that heterogeneity in risk aversion, impatience and portfolio diversification is crucial to match the empirical schedules of unconditional risky share, participation and share of idiosyncratic variance in individual portfolios. At the same time, these elements generate dispersion in wealth through their heterogeneous effects on individuals' investment decisions resulting in a cross-sectional wealth distribution that provides a close fit of the data, particularly at the very top.

Place, publisher, year, edition, pages
Stockholm: Department of Economics, Stockholm University , 2023. , p. 193
Series
Monograph series / Institute for International Economic Studies, University of Stockholm, ISSN 0346-6892 ; 124
Keywords [en]
Macroeconomics, household finance, income risk, portfolio choice, wealth inequality, heterogeneous agents, insurance, search and matching
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:su:diva-216752ISBN: 978-91-8014-368-4 (print)ISBN: 978-91-8014-369-1 (electronic)OAI: oai:DiVA.org:su-216752DiVA, id: diva2:1753384
Public defence
2023-06-14, hörsal 11, hus F, Södra Husen, Universitetsvägen 10 F, Stockholm, 13:00 (English)
Opponent
Supervisors
Available from: 2023-05-22 Created: 2023-04-26 Last updated: 2023-07-17Bibliographically approved

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CiteExportLink to record
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Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
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