We construct a growth model consistent with China's economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial firms use more productive technologies, but due to financial imperfections they must finance investments through internal savings. State-owned firms have low productivity but survive because of better access to credit markets. High-productivity firms outgrow low-productivity firms if entrepreneurs have sufficiently high savings. The downsizing of financially integrated firms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China's economic transition. (JEL E21, E22, E23, F43, L60, O16, O53, P23, P24, P31)

We ask how idiosyncratic labor-market risk varies over the business cycle. A difficulty in addressing this question is the limited time-series dimension of existing panel data sets. We address this difficulty by developing a GMM estimator which conditions on the macroeconomic history experienced by each member of the panel. Variation in the cross-sectional variance between households with differing macroeconomic histories allows us to incorporate business-cycle information dating back to 1930, even though our data only begins in 1968. We implement this estimator using household-level labor-earnings data from the Panel Study on Income Dynamics. We estimate that idiosyncratic risk is (i) highly persistent, with an autocorrelation coefficient of 0.95, and (ii) strongly countercyclical, with a conditional standard deviation that increases by 75% (from 0.12 to 0.21) as the macroeconomy moves from peak to trough.

A striking feature of U.S. data on income and consumption is that inequality increases with age. This paper asks if individual-specific earnings risk can provide a coherent explanation. We find that it can. We construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes. Earnings inequality is exogenous and is calibrated to match data from the U.S. Panel Study on Income Dynamics. Consumption inequality is endogenous and matches well data from the U.S. Consumer Expenditure Survey. The total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years. In welfare terms, the latter is found to be more important than the former. JEL Classification Codes: E21, D31.Keywords: Risk sharing, buffer-stock savings, consumption inequality * In addition to numerous participants at seminars and conferences, we thank Dave Backus, Rick Green, Burton Hollifield, Dean Hyslop, Mark Huggett, Bob Miller, Christina Paxson, Ed Prescott, B. Ravikumar, Víctor Ríos-Rull, Tom Sargent, Nick Souleles, Kenneth Wolpin, Stan Zin, and an anonymous referee for helpful comments and suggestions. We have benefited from the support of NSF grant SES-9987602 and the Rodney White Center at Wharton.