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Unobserved heterogeneity in income dynamics: an empirical Bayes perspective

Author

Listed:
  • Jiaying Gu

    (Institute for Fiscal Studies and University of Toronto)

  • Roger Koenker

    (Institute for Fiscal Studies and UCL)

Abstract
Empirical Bayes methods for Gaussian compound decision problems involving longitudinal data are considered. The new convex optimization formulation of the nonparametric (Kiefer-Wolfowitz) maximum likelihood estimator for mixture models is employed to construct nonparametric Bayes rules for compound decisions. The methods are fi rst illustrated with some simulation examples and then with an application to models of income dynamics. Using PSID data we estimate a simple dynamic model of earnings that incorporates bivariate heterogeneity in intercept and variance of the innovation process. Profi le likelihood is employed to estimate an AR(1) parameter controlling the persistence of the innovations. We fi nd that persistence is relatively modest, ?˜ 0.48, when we permit heterogeneity in variances. Evidence of negative dependence between individual intercepts and variances is revealed by the nonparametric estimation of the mixing distribution, and has important consequences for forecasting future income trajectories.

Suggested Citation

  • Jiaying Gu & Roger Koenker, 2014. "Unobserved heterogeneity in income dynamics: an empirical Bayes perspective," CeMMAP working papers CWP43/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:cemmap:43/14
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    File URL: https://www.ifs.org.uk/uploads/cemmap/wps/cwp431414.pdf
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    References listed on IDEAS

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    Cited by:

    1. Stéphane Bonhomme & Koen Jochmans & Jean-Marc Robin, 2017. "Nonparametric estimation of non-exchangeable latent-variable models," Sciences Po publications info:hdl:2441/4m4fqk908d9, Sciences Po.
    2. repec:hal:spmain:info:hdl:2441/lpag9391598uoauqu4u9opq76 is not listed on IDEAS
    3. Jiaying Gu & Roger Koenker, 2016. "On a Problem of Robbins," International Statistical Review, International Statistical Institute, vol. 84(2), pages 224-244, August.
    4. repec:hal:spmain:info:hdl:2441/4m4fqk908d9obqasu0uhft7t94 is not listed on IDEAS
    5. Bonhomme, Stéphane & Jochmans, Koen & Robin, Jean-Marc, 2017. "Nonparametric estimation of non-exchangeable latent-variable models," Journal of Econometrics, Elsevier, vol. 201(2), pages 237-248.

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