_apndx-scf-data-input.tex

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\section{SCF Data}\label{app:scf-data}

Data used in the estimation is constructed using the SCF 1992, 1995, 1998, 2001 and 2004 waves. The definition of wealth is net worth including housing wealth, but excluding pensions and social securities. The data set contains only households whose heads are aged 26-60 and excludes singles, following Cagetti~\citeyearpar{cagettiWprofiles}.\footnote{Cagetti~\citeyearpar{cagettiWprofiles}\ argues that younger households should be dropped since educational choice is not modeled. Also, he drops singles, since they include a large number of single mothers whose saving behavior is influenced by welfare.} Furthermore, the data set contains only households whose heads are college graduates. The total sample size is 4,774.

In the waves between 1995 and 2004 of the SCF, levels of \textit{normal} income are reported. The question in the questionnaire is "About what would your income have been if it had been a normal year?" We consider the level of normal income as corresponding to the model's theoretical object $P$, permanent noncapital income. Levels of normal income are not reported in the 1992 wave. Instead, in this wave there is a variable which reports whether the level of income is normal or not. Regarding the 1992 wave, only observations which report that the level of income is normal are used, and the levels of income of remaining observations in the 1992 wave are interpreted as the levels of permanent income.

Normal income levels in the SCF are before-tax figures. These before-tax permanent income figures must be rescaled so that the median of the rescaled permanent income of each age group matches the median of each age group's income which is assumed in the simulation. This rescaled permanent income is interpreted as after-tax permanent income. Rescaling is crucial since in the estimation empirical profiles are matched with simulated ones which are generated using after-tax permanent income (remember the income process assumed in the main text). Wealth / permanent income ratio is computed by dividing the level of wealth by the level of (after-tax) permanent income, and this ratio is used for the estimation.\footnote{Please refer to the archive code for details of how these after-tax measures of $P$ are constructed.}