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

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  • Dirk Krueger
  • Fabrizio Perri

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.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00373.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 1 ()
Pages: 163-193

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Handle: RePEc:oup:restud:v:73:y:2006:i:1:p:163-193

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