Consumption and Labor Supply with Partial Insurance: An Analytical Framework

49 Pages Posted: 18 Aug 2009 Last revised: 11 Mar 2023

See all articles by Jonathan Heathcote

Jonathan Heathcote

Minneapolis Fed

Kjetil Storesletten

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR)

Giovanni L. Violante

New York University (NYU) - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: August 2009

Abstract

This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and cross-sectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.

Suggested Citation

Heathcote, Jonathan and Storesletten, Kjetil and Violante, Giovanni L., Consumption and Labor Supply with Partial Insurance: An Analytical Framework (August 2009). NBER Working Paper No. w15257, Available at SSRN: https://ssrn.com/abstract=1454990

Jonathan Heathcote

Minneapolis Fed ( email )

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Kjetil Storesletten (Contact Author)

University of Oslo - Department of Economics ( email )

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Norway
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanni L. Violante

New York University (NYU) - Department of Economics ( email )

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New York, NY 10011
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom