Research / BFI Working PaperOct 01, 2016

Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework

We develop a new quantile-based panel data framework to study the nature of income persistence and the transmission of income shocks to consumption. Log-earnings are the sum of a general Markovian persistent component and a transitory innovation. The persistence of past shocks to earnings is allowed to vary according to the size and sign of the current shock. Consumption is modeled as an age-dependent nonlinear function of assets, unobservable tastes and the two earnings components. We establish the nonparametric identification of the nonlinear earnings process and of the consumption policy rule. Exploiting the enhanced consumption and asset data in recent waves of the Panel Study of Income Dynamics, we find that the earnings process features nonlinear persistence and conditional skewness. We confirm these results using population register data from Norway. We then show that the impact of earnings shocks varies substantially across earnings histories, and that this nonlinearity drives heterogeneous consumption responses. The framework provides new empirical measures of partial insurance in which the transmission of income shocks to consumption varies systematically with assets, the level of the shock and the history of past shocks.

More Research From These Scholars

BFI Working Paper Mar 13, 2023

Identification in a Binary Choice Panel Data Model with a Predetermined Covariate

Stéphane Bonhomme, Kevin Dano, Bryan S. Graham
Topics:  Uncategorized
BFI Working Paper Aug 6, 2020

How Much Should We Trust Estimates of Firm Effects and Worker Sorting?

Stéphane Bonhomme, Kerstin Holzheu, Thibaut Lamadon, Elena Manresa, Magne Mogstad, Bradley Setzler
Topics:  Employment & Wages
BFI Working Paper Feb 3, 2021

Teams: Heterogeneity, Sorting, and Complementarity

Stéphane Bonhomme
Topics:  Uncategorized