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

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: E21 D91 D63 D31 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-ltv
Date: 2005-01-15
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Related works:
Working Paper: Does Income Inequality Lead to Consumption Inequality? Evidence and Theory (2002)
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)
Journal Article: Does Income Inequality Lead to Consumption Inequality? Evidence and Theory (2006)
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