This paper studies how "rational inattention (RI)" -- a type of information processing constraint proposed by Sims (2003) -- affects the joint dynamics of consumption and income in a permanent income model with general income processes. Specifically, I propose an analytical approach to solve the...

This paper offers an explanation for the puzzle of low wealth holdings among a significant fraction of the elderly. Instead of invoking irrational, non-rational, or non-optimal behavior to resolve the puzzle, it is shown that widespread low wealth holdings are consistent with a rational...

This paper provides an introduction to the special issue of the Review of Economic Dynamics on "Cross Sectional Facts for Macroeconomists''. The issue documents, for nine countries, the level and the evolution, over time and over the life cycle, of several dimensions of economic inequality,...

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the...

Two key components of the recent U.S. health reform are a new regulation of the individual health insurance market and an increase in income redistribution in the economy. Which component contributes more to the welfare outcome of the reform? We address this question by constructing a general...

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. We determine the extent to which these qualitative and quantitative patterns can or cannot be produced by Pareto efficient...

This paper characterizes the solution to a consumption/savings decision problem in which one of the consumption goods involves transaction costs. It then analyzes how such adjustment costs affect consumers' risk attitudes. Previous studies have suggested that transaction costs, by resulting in...

In this paper I analyze the effects of innovations in information technology on the mortgage and housing markets using a life-cycle model with incomplete markets and idiosyncratic income, as well as moving and house price shocks. I explicitly model the housing tenure choices of households....

This paper highlights the identification problem of the reduced-form approach in quantifying the degree of consumption insurance as in Blundell et al. (2008, BPP thereafter). I argue that the reduced-form estimates are difficult to interpret in terms of the degree of consumption insurance. I...

Empirical evidence suggests that the poor spend a larger fraction of their income on gambling than the well-to-do. This paper shows that "means tests" for public-assistance eligibility could supply part of the explanation. Income support programs can distort private budget sets, conceivably...