Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1

Dirk Krueger and Fabrizio Perri

The Review of Economic Studies, 2006, vol. 73, issue 1, 163-193

Abstract: Using data from the Consumer Expenditure Survey, we first document that the recent increase in income inequality in the U.S. 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 characterize analytically 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. 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, can account for the documented stylized consumption inequality facts from the U.S. data. Copyright 2006, Wiley-Blackwell.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:73:y:2006:i:1:p:163-193

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