When households engage in upward comparisons
In this paper, Pickard et al. explore how asymmetric social comparison, i.e. when individuals tend to engage disproportionately in upward comparisons, affects their willingness to take on risk. Towards this goal, they combine data from the Global Preferences Survey on risk preferences in 76 countries with country-level inequality measures constructed based on data from the Standardized World Income Inequality Database (SWIID) and the World Bank. To measure inequality they are using the Gini Index in addition to income share held by the top and bottom 10th percentile, the Palma ratio (the share of income held by top 10th percentile divided by the share held by the bottom 40th) and the 80/20 income share ratio.
The analysis of our combined data reveals a robust relationship between inequality and the willingness to take risk, across the entire sample and various subsamples. At both the individual and country-level, we find a precise, stable estimate that indicates higher inequality is significantly associated with a greater degree of risk taking.
Inequality and risk preference
Authors: Harry Pickard, Thomas Dohmen, Bert Van Landeghem
From: Newcastle University, University of Bonn, University of Sheffield
When households engage in downward comparisons
In this paper, Bilbiie et al. explore the channels through which inequality matters for business cycles. The authors estimate a dynamic stochastic general equilibrium (DSGE) model with heterogenous households. In particular, there are two types of households: a) the savers, who choose consumption and saving by maximizing intertemporal utility as standard representative consumers; and b) the hand-to-mouth, who consume all their post-tax income in every period. The presence of these agents with high marginal propensity to consume amplifies business cycles if their income is relatively more exposed to aggregate fluctuations. In the model, the savers have higher income than the hand-to mouth households, but they face the risk of becoming the poor with a given probability in every period. This risk gives them a precautionary reason to save, which further propagates business cycles. They estimate their model using US aggregate data and information from the Current Population Survey from 1967 to 2017. The model reveals two important elements that link inequality to business cycle fluctuations:
- Income and consumption differences across agents shrink during booms and expand in recessions.
- Idiosyncratic risk, namely the probability of experiencing large income and consumption drops is higher in recessions.
We find that inequality substantially amplifies cyclical fluctuations. The primary source of this amplification is cyclical precautionary saving behavior. Savers reduce their consumption to insure themselves against the idiosyncratic risk of large income drops, which rises in recessions.
Inequality and Business Cycles
Authors: Florin Bilbiie, Giorgio E. Primiceri, Andrea Tambalotti
From: University of Cambridge, Northwestern University, Federal Reserve Bank of New York
