| Households are heterogenous in many respects. They face different constraints, may have different preferences and experience idiosyncratic risks to their incomes. In theory, heterogeneity matters for individual portfolio composition, consumption, savings, and wealth accumulation. In the data, researchers do not usually observe individual attitudes towards risks and do not have full information on the sources of income risks.; In Chapter 1, we study the household income process which, consistent with the literature on income processes and consumption, is modelled as the sum of permanent and transitory components. The innovation of this work is that, different from the literature, the shocks to permanent and transitory components are allowed to be correlated. In the case of correlated shocks, researchers cannot identify the joint distribution of transitory and permanent innovations to household income. Households, unlike the researchers, take into account the correlation between permanent and transitory shocks. Using the buffer stock model of savings, we show that the correlation between permanent and transitory shocks matters for the model's predictions. Furthermore, using household data on consumption and income, we estimate the life cycle buffer stock model and show that the correlation is significantly negative, contrary to the value of zero assumed in the literature. In addition, we estimate precise and reasonable coefficients for the relative risk aversion and time discount factor.; In Chapter 2, we study the determinants of individual-level risk aversion using data from the Panel Study of Income Dynamics. Our analysis reveals that the education of parents (particularly mothers) strongly influences the risk aversion of offsprings many years later. Other significant determinants of risk aversion are age, gender, race, religion, and whether individuals were raised in a county with high average income and education. We show that measured risk aversion predicts an individual's propensity to own businesses, the share of stocks in household portfolios, and the volatility of individual and household income. |
