INCENTIVES, INSURANCE, AND THE VARIABILITY OF CONSUMPTION AND LEISURE

This paper considers to what extent dynamic incentive models such as Green (1987), Phelan and Townsend (1991), and Atkeson and Lucas (1992) can quantitatively explain why some individuals consume (or work) more than others and why a typical individual's consumption (or leisure) varies over time. A simple repeated agency model is shown to be able to better match several population moments concerning life-cycle labor supply and consumption variation than the same model without incentive constraints. On the other hand, I show for the standard stylized models of repeated agency, incentive-induced variability is an insufficient explanation of the variability in the data.