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Rags and Riches: Relative Prices, Non-Homothetic Preferences, and Inequality in India

Ingvild Almås and Anders Kjelsrud

World Development, 2017, vol. 97, issue C, 102-121

Abstract: It is well known that consumption patterns change with income. Relative price changes would therefore affect rich and poor consumers differently. Yet, the standard price indices are not income-specific, and hence, they cannot account for such differences. In this paper, we study consumption inequality in India, while fully allowing for non-homotheticity. We show that the relative price changes during most of the period from 1993 to 2012 were pro-poor, in the sense that they favored the poor relative to the rich. As a result, we also find that conventional measures significantly overstate the rise in real consumption inequality during this period. The main lesson from our study is the importance of accounting for non-homotheticity when measuring inequality. The price index literature has, as of yet, paid relatively little attention to this. In our application, however, it turns out that the allowance for non-homotheticity is quantitatively much more important than much discussed adjustments, such as those for substitution in consumption.

Keywords: India; Asia; cereal; consumption; income; distribution (search for similar items in EconPapers)
Date: 2017
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