Income and Consumption: A Micro Semi-Structural Analysis with Pervasive Heterogeneity

Abstract

We develop a model for consumption and income that allows for pervasive heterogeneity and co-dependence between the structural parameters. This provides a comprehensive unifying framework to study income and consumption dynamics jointly. We estimate a full set of structural parameters that describe the joint distribution of preference parameters and earnings process parameters. The framework is sufficiently flexible that the household level heterogeneity in both preference and income process parameters can be accounted for under the standard intertemporal consumption model. We find that both consumption and income processes display considerable heterogeneity and that this heterogeneity is correlated across the two processes.

Keywords: preference heterogeneity, consumption, income

JEL Classification: C33, D12, D31, J31