Heterogeneity in income processes

Abstract

Macroeconomists are increasingly interested in heterogeneity in individuals' preferences and in the income risk that they face. Previous empirical papers have focused on only one or a few aspects of heterogeneity. In this paper, we estimate the entire joint distribution of risk preferences and income processes. Our model allows individual-specific trends, persistence and volatility of income and permits all of these characteristics to be correlated with the individual's risk preferences. We find substantial heterogeneity in all parameters of the income process. These findings potentially have substantial implications for the conclusions of microfounded macro models.

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