How does the firm's role as an insurance provider vary over the business cycle? Using Swedish administrative data, I document that idiosyncratic firm productivity shocks are passed through workers' earnings asymmetrically. In non-recessions, firms are good insurers against negative shocks. In downturns, they pass through a larger share of their shock. Regardless of the state of the economy, instead, positive shocks are mainly passed through when sizeable. I rationalize these findings using a directed search model of the labor market with recursive contracts. Moral hazard risk associated with on-the-job search is key to generating pass-through and the increased risk of firm disaster in recessions is necessary for matching the empirical facts. 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. Welfare calculations reveal that workers would be willing to give up a non-negligible share of consumption to avoid this source of uncertainty.

What are the key elements to generate portfolio choices over the wealth distribution in line with the data? In this paper, we argue that capturing preference heterogeneity across individuals is one of them. Using a partial equilibrium Bewley-type model with endogenous portfolio choice and cyclical skewness in labor income shocks, we show that heterogeneity in risk aversion, impatience and portfolio diversification is crucial to match the empirical schedules of unconditional risky share, participation and share of idiosyncratic variance in individual portfolios. At the same time, these elements generate dispersion in wealth through their heterogeneous effects on individuals’ investment decisions resulting in a cross-sectional wealth distribution that provides a close fit of the data, particularly at the very top.

There is a long-standing literature in economics whose goal is to infer properties of individuals’ income and human capital and their impact on consumption-saving decisions by using revealed choices, especially on consumption. While this approach is superior to the utilization of income data alone, it nevertheless relies on very strong assumptions on the form of the stochastic process for income, in particular it hard-wires the relationship between shocks to current income and expected future income, that is, human capital. In this paper we develop a new method that enables to perform this task without imposing any restriction on the latter. Specifically, we log-linearize the recursive relationship defining human capital, insert it into a linearized savings policy function and derive moment conditions which, in turn, we use for GMM estimation of the parameters governing moments of the joint and marginal distributions of savings and income. Using high quality Swedish administrative data on wealth – which enables us to overcome the well-known issues deriving from using imputed or survey data – we find that about 60 percent of human capital corresponds to expected income in the following year. This result suggests that individuals are very short-sighted regarding their future income when they make consumption-saving decisions.