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Interpreting Life-Cycle Inequality Patterns as an Efficient Allocation: Mission Impossible?
The life-cycle patterns of consumption, wage and hours inequality observed in U.S. cross-section data are commonly viewed as incompatible with a Pareto efficient allocation. Are these patterns consistent with Pareto efficiency in a model with preference shocks, wage shocks and full information? We determine the extent to which the qualitative and quantitative patterns can or cannot be produced by Pareto efficient allocations in such models.