Recent empirical evidence supports the view that the income process has an individual-specific growth rate component [Baker (1997), Guvenen (2007b), and Huggett, Ventura, and Yaron (2007)]. Moreover, the individual-specific growth component may be stochastic. Motivated by these empirical...

Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that allowing for these rich features of earnings dynamics, in the context of a structurally estimated life-cycle portfolio choice model, helps to rationalize the limited participation...