Income risk, heterogeneity, and the macroeconomy

NAISS 2024/5-138


NAISS Medium Compute

Principal Investigator:

Gualtiero Azzalini


Handelshögskolan i Stockholm

Start Date:


End Date:


Primary Classification:

50201: Economics



This project is part of my research agenda aiming at understanding income risk and heterogeneity and their impact on the macroeconomy. Income risk and economic actors’ heterogeneity are two important determinants of economic choices and by studying them one can derive policy implications of paramount importance. One strand of this agenda analyzes the formation and sources of household income risk. Part of this strand is the work “Business cycle asymmetry of earnings pass-through” in which I investigate earnings pass-through, a particular type of income risk deriving from the transmission of idiosyncratic firm shocks to workers' earnings. I document in the data that earnings pass-through is heterogeneous over the business cycle and I show that the empirical patterns can be rationalized using a directed search model of the labor market with recursive contracts. A second strand investigates how much information on income risk one can get from households’ revealed choices. The main idea is that, to the extent that income risk influences economic choices, the latter should be informative on the type of income risk that agents face. Part of this strand are the works “Inferring income properties from portfolio choices” and “Human capital inference”. In the first work properties of the income process are inferred by looking at household portfolio allocation choices, while in the second by looking at their savings decisions. Finally, a third strand of this agenda studies the impact of heterogeneity on economic choices and, in turn, on the macroeconomy. Part of this strand is the work “Preference heterogeneity and portfolio choices over the wealth distribution” where it is studied to what extent capturing the effects of income risk and preference heterogeneity on portfolio choices over the wealth distribution helps explaining inequality. All the projects within this research agenda use state-of-the-art techniques for model solution and estimation and require, therefore, large computational power.