Luigi Pistaferri

An Empirical Analysis of Earnings and Employment Risk

The mean and higher moments of the distribution of future income are crucial determinants of individual choices. These moments are usually estimated in panel data from past income realizations. Inthis article we rely instead on subjective expectations available in the 1995 Survey of Household Income and Wealth, a large random sample representative of Italian households. The survey elicits information on the distribution of future earnings and on the probability of unemployment. Analysis of this distribution helps us understand how individual uncertainty evolves over the life cycle and if attitudes toward risk affect occupational choices and income riskiness.

Income Volatility and Household Consumption: The Impact of Food Assistance Programs

The impact offood assistance programs (food stamps) in a period of rising income inequality in the United States is analyzed using 1978-92 PSID data. We assess to what extent food assistance can be viewed as an effective insurance to permanent shocks to income. The results show that the program has a substantial consumption-smoothing effect in the lowincome population: The response of food consumption to a permanent income shock is a third lower after accounting for the monetary value of food stamps.

Superior Information, Income Shocks, And The Permanent Income Hypothesis

According to the permanent income hypothesis with quadratic preferences, savings should react only to transitory income shocks, but not to permanent shocks. The problem is that income shock components are not separately observable. I show how the combination of income realizations with subjective expectations can help to identify separately the transitory and the permanent shock to income, thus providing a powerful test of the theory. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth.

Wages, Employment, and Capital in Capitalist and Worker-Owned Firms

The authors investigate how worker-owned and capitalist enterprises differ with respect to wages, employment, and capital in Italy, the market economy with the greatest incidence of worker-owned and worker-managed firms. Estimates calculated using a matched employer-worker panel data set for the years 1982–94 largely corroborate the implications of orthodox behavioral models of the two types of enterprise. Co-ops had 14% lower wages than capitalist enterprises, on average; more volatile wages; and less volatile employment. Given the quality of the data set analyzed, the authors argue, these results can be regarded as having broad generality.

Household Heterogeneity and Real Exchange Rates

We assume that individuals can fully insure themselves against cross-country shocks, but not against individual-specifi cs hocks. We consider two particular models of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. For each model, we derive a restriction relating the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the US and the UK. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The restrictions implied by the complete risk-sharing model and the DI model fare poorly. ∗ This paper was prepared for the Economic Journal Lecture at the 2006 Royal Economic Society meetings. Kocherlakota thanks Winnie Choi for many stimulating conversations about real exchange rates. Kocherlakota acknowledges the support of NSF 0305833 and 0606695. We thank an associate editor of the journal, George Alessandria and Ivan Werning for helpful comments, Jaromir Nosal and Sonam Sherpa for research assistance, Orazio Attanasio and Andrew Leicester for help with the FES data, and Joan Gieseke and Hakki Yazici for editorial assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Tax Incentives and the Demand for Life Insurance: Evidence from Italy

The theoretical literature suggests that taxation can have a large impact on household portfolio selection and allocation. In this Paper we consider the tax treatment of life insurance, considering the cancellation of tax incentives in Italian life insurance contracts for investors with high marginal tax rates and the introduction of incentives for those with low rates. Using repeated cross-sectional data from 1989 to 1998, we find that the tax reforms had no effect on the decision to invest in life insurance or the amount invested. The likely explanations are the lack of information and lack of commitment to long-term investment.

Financial Integration and Consumption Smoothing

We present a new empirical strategy for testing if financial integration improves risk sharing opportunities and consumption smoothing. Our test is based on a decomposition of the variance of consumption growth into a component that depends on the variance of permanent income shocks and one that depends on the variance of transitory shocks. We then test if the process of financial market integration and liberalization brought about by the introduction of the euro has made consumption less sensitive to income shocks in Italy. The paper makes a significant contribution also from a methodological point of view. We use panel data on income to identify non parametrically a time series of the variances of the income shocks. We then rely on repeated cross-sections of consumption and income to identify the degree of smoothing with respect to income shocks, and test if it has declined after the introduction of the euro. Our procedure does not require that consumption and income are available in the same panel data. It can therefore be applied in all countries in which repeated cross-sectional consumption data can be combined with panel data on income.

A Direct Test of The Buffer-Stock Model of Saving

Recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations. When wealth is below an optimal target, consumers try to increase their buffer stock of wealth by saving more. When it is above target, they increase consumption. This important implication of the buffer stock model of saving has not been subject to direct empirical testing. We derive from the model an appropriate theoretical restriction and test it using data on working-age individuals drawn from the 2002 and 2004 Italian Surveys of Household Income and Wealth. One of the most appealing features of the survey is that it has data on the amount of wealth held for precautionary purposes, which we interpret as target wealth in a buffer stock model. The test results do not support buffer stock behaviour, even among population groups that are more likely, a priori, to display such behaviour. The saving behaviour of young households is instead consistent with models in which impatience, relative to prudence, is not as high as in buffer stock models.

Heterogeneity and Persistence in Returns to Wealth

We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

Inequality and Real Exchange Rates

Kocherlakota and Pistaferri (2007) describe two different models (Private Information Pareto Optimal and Incomplete Markets) of how households partially insure themselves against idiosyncratic shocks. They demonstrate that the models differ in terms of their implications for real exchange rates. In this paper, we use data from a wide range of countries, and document that there is a statististically significant relationship between real exchange rate growth and between-country differences in the growth rates of right-tail, but not left-tail, inequality growth. This finding is consistent with the Private Information Pareto Optimal model of partial insurance, but not the Incomplete Markets model. (JEL:F31, D30, D91 ) (c) 2008 by the European Economic Association.