Does income inequality lead to consumption inequality? Evidence and theory

Dirk Krueger and Fabrizio Perri

No 2005/15, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: Using data from the Consumer Expenditure Survey we first document that the recent increase in income inequality in the US has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which has increased significantly for income but little for consumption. We then develop a simple framework that allows us to analytically characterize how within-group income inequality affects consumption inequality in a world in which agents can trade a full set of contingent consumption claims, subject to endogenous constraints emanating from the limited enforcement of intertemporal contracts (as in Kehoe and Levine, 1993). Finally, we quantitatively evaluate, in the context of a calibrated general equilibrium production economy, whether this set-up, or alternatively a standard incomplete markets model (as in Ayiagari 1994), can account for the documented stylized consumption inequality facts from the US data.

Keywords: Limited Enforcement; Risk Sharing; Consumption Inequality (search for similar items in EconPapers)
JEL-codes: D31 D63 D91 E21 G22 (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

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Related works:
Working Paper: Does income inequality lead to consumption equality? evidence and theory (2005)
Working Paper: Does Income Inequality Lead to Consumption Inequality? Evidence and Theory (2002)
Working Paper: Does Income Inequality Lead to Consumption Inequality? Evidence and Theory (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200515

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