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Discussion Paper Details

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Title: How Much Consumption Insurance in Bewley Models with Endogenous Family Labor Supply?

Author(s): Dirk Krueger and Chunzan Wu

Publication Date: March 2018

Keyword(s): Bewley Models, Consumption Insurance and Labor Supply

Programme Area(s): Labour Economics, Macroeconomics and Growth, Monetary Economics and Fluctuations and Public Economics

Abstract: We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. With additively separable preferences, 43% of male and 23% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 34% and 20%. With non-separable preferences the model predicts more consumption insurance, with pass-through rates of $29% and $16%. Most of the consumption insurance against permanent male wage shocks is provided through the labor supply response of the female earner.

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Bibliographic Reference

Krueger, D and Wu, C. 2018. 'How Much Consumption Insurance in Bewley Models with Endogenous Family Labor Supply?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12828