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Why Is Consumption More Log Normal than Income? Gibrat's Law Revisited

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  • Erich Battistin
  • Richard Blundell
  • Arthur Lewbel

Abstract

Significant departures from log normality are observed in income data, in violation of Gibrat's law. We show empirically that the distribution of consumption expenditures across households is, within cohorts, closer to log normal than the distribution of income. We explain this empirical result by showing that the logic of Gibrat's law applies not to total income, but to permanent income and to marginal utility. (c) 2009 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 117 (2009)
Issue (Month): 6 (December)
Pages: 1140-1154

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Handle: RePEc:ucp:jpolec:v:117:y:2009:i:6:p:1140-1154

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  1. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  2. Bruce D. Meyer & James X. Sullivan, 2003. "Measuring the Well-Being of the Poor Using Income and Consumption," NBER Working Papers 9760, National Bureau of Economic Research, Inc.
  3. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  4. Wooldridge, Jeffrey M. & White, Halbert, 1988. "Some Invariance Principles and Central Limit Theorems for Dependent Heterogeneous Processes," Econometric Theory, Cambridge University Press, vol. 4(02), pages 210-230, August.
  5. Deaton, A. & Paxson, C., 1993. "Intertemporal Choice and Inequality," Papers 168, Princeton, Woodrow Wilson School - Development Studies.
  6. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May.
  7. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  8. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  9. Erich Battistin, 2003. "Errors in survey reports of consumption expenditures," IFS Working Papers W03/07, Institute for Fiscal Studies.
  10. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, 01.
  11. Richard Blundell & Ian Preston, 1995. "Income, expenditure and the living standards of UK households," Fiscal Studies, Institute for Fiscal Studies, vol. 16(3), pages 40-54, August.
  12. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Imputing consumption in the PSID using food demand estimates from the CEX," IFS Working Papers W04/27, Institute for Fiscal Studies.
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