This thesis consists of three self-contained essays. All of them combine the usage of micro and macro data and quantitative models to study how agents balance their exposure to income risk when facing idiosyncratic and aggregate shocks. 

Business cycle asymmetry of earnings pass-through

This chapter analyzes how endogenous income risk emerges from the optimal risk-sharing allocation between workers and firms. While understanding how much firms insure their workers against salary fluctuations is a long-standing topic in economics, this paper examines this question from a new angle by investigating how firms' ability to do that varies over the business cycle. Using Swedish administrative data, Gualtiero documents that the pass-through of idiosyncratic firm shocks to workers' earnings is asymmetric over the cycle. Firms insure workers against negative shocks in non-recessionary periods, but they do much less so in downturns. Positive shocks, on the other hand, are shared with employees especially if sizable, and this holds regardless of the state of the economy. Gualtiero further shows that these empirical patterns can be rationalized using a directed search model of the labor market with on-the-job search, risk-averse workers, and firm commitment. In addition to matching earnings pass-through asymmetries found in the data, as the wage growth distribution features procyclical skewness and acyclical variance, the model also suggests a new mechanism for explaining trends in income risk variation over the business cycle. Finally, evaluating the welfare cost of business cycles reveals that they are substantial in this framework.

Inferring income properties from portfolio choices

This second chapter shows that endogenous income risk coming from agents' portfolio choices is informative on the true nature of the labor income process. Although the literature trying to understand the properties of the income process is vast, two main hypotheses have emerged: according to one, income shocks are very persistent and agents face similar life-cycle profiles - Restricted Income Profiles (RIP); according to the other, income shocks are not very persistent and life-cycle profiles are individual-specific - Heterogeneous Income Profiles (HIP). In this paper, Gualtiero studies whether agents' portfolio choices contain relevant information allowing us to discern which of the two views is more supported by the data. The main idea is that, since diverse types of income risk imply different portfolio allocation decisions, by looking at the latter the researcher can infer properties of the income process. Gualtiero finds that HIP and RIP imply different life-cycle patterns of the participation and conditional risky share choices but similar patterns of consumption and saving. Crucial for this result is the inclusion of cyclical skewness in the stochastic process for income, which enables us to correctly estimate the part of income risk deriving from the persistence of the shocks. Comparing the model-generated profiles with their empirical equivalents in Swedish administrative data reveals that the latter provides slightly stronger support for the RIP hypothesis.

Preference heterogeneity and portfolio choices over the wealth distribution 

The third chapter, jointly written with Markus Kondziella and Zoltán Rácz, illustrates that endogenous income risk ensuing from preference heterogeneity across individuals helps explain wealth inequality. Starting from the fact that explaining individuals' portfolio choices and cross-sectional wealth inequality remain two challenging issues in household finance and macroeconomics, the paper shows that connecting the two literatures can help to address both issues simultaneously. Specifically, the authors add to the standard incomplete markets macro model endogenous portfolio choice, a non-normal return process, cyclical skewness in labor income shocks, Epstein-Zin preferences and preference heterogeneity across individuals. Estimating the model parameters governing the heterogeneity in preferences to match the increasing risky share, participation rate and share of idiosyncratic return risk over the wealth distribution documented in the data, they find that to get a good match the economy has to be populated by two types of agents: one featuring higher risk aversion and impatience and the other characterized by lower values of the same parameters. Indeed, as agents of the latter type endogenously end up at the top of the distribution, the model is able to capture the increasing relation between wealth and risky share found empirically and, in turn, to generate wealth inequality at the top. Examining the results of the benchmark specification with counterfactual economies in which different components are shut down one at a time, the authors find that the model fit is always worsened.

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Gualtiero will also defend his thesis on 14 June.

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