Unequal Lives – Heterogeneity in Income Risk and Household Portfolios

Speaker: Prof Christian Bayer

Affiliation: University of Bonn

Location: Room W458, Forgan Smith Building (#01), St Lucia Campus

Zoom: https://uqz.zoom.us/j/82603079317

Abstract: Labor earnings risk is the largest economic risk faced by most households. We document large and persistent heterogeneity in this risk with a negative correlation between risk and earnings levels. We develop a Markov-switching state-space model for earnings risk that provides us with estimates of the time-varying risk type of a worker. Combining these estimates with wealth data, we show that low-risk workers accumulate more wealth and invest more in illiquid assets. We develop a life-cycle model with persistent risk types and incomplete, frictional asset markets to study the mechanisms linking risk, wealth accumulation, and portfolio composition.