Working Paper No. 24-04 - Insurance against Income Shocks, Parental Investments, and Child

Using register data from Norway (for about 580000 children born in the 70s and tracked through 2010), we start by estimating the family income process for the first 16 years of life of the child, allowing us to characterize the magnitude of permanent and transitory shocks to income at different stages of childhood, for households defined by different demographics (education of the mother and fathe. [...] It is, however, the first one to distinguish the role of transitory and permanent shocks occurring in different periods, a distinction which is crucial to understanding the consequences of changes in inequality, and the design of social insurance programs, which should be informed by the knowledge of which shocks are particularly hard (or easy) for households to insure against, and whether the tim. [...] The variance of permanent and transitory shocks across child age along with the MA parameter θ are allowed to vary across cells, cfe.14 Next, we consider the identification of the effect of the permanent and transitory shocks on human capital formation. [...] Equation 7 describes the relationship between the covariance between human capital and the first difference of (residual) income at each age of the child (i.e., the income shock), and the variances of permanent and transitory income shocks at different ages. [...] Since the standard deviation of log income is in the range of 0.6-0.7 for household income, transitory shocks represent around 25% of a standard deviation in annual income, whilst the permanent shocks are of the magnitude of around 50% of a standard deviation in annual income.