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Consumption inequality and intra-household allocations

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Author Info
Jeremy Lise () (Institute for Fiscal Studies and University College London)
Shannon Seitz

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Abstract

The consumption literature uses adult equivalence scales to measure individual level inequality. This practice imposes the assumption that there is no within household inequality.

In this paper, we show that ignoring consumption inequality within households produces misleading estimates of inequality along two dimensions. First, the use of adult equivalence scales underestimates the level of cross sectional consumption inequality by 30 percent, as large differences in the earnings of husbands and wives translate into large differences in consumption allocations within households. Second, the rise in inequality since the 1970s is overstated by almost two-thirds: within household inequality declined over time as the share of income provided by wives increased. Our findings also indicate that increases in marital sorting on wages and hours worked can simultaneously explain virtually all of the decline in within household inequality and a substantial fraction of the rise in between household inequality for one and two adult households in the UK since the 1970s.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W07/09.

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Date of creation: Jul 2007
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Handle: RePEc:ifs:ifsewp:07/09

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Shannon N. Seitz, 2002. "Accounting for Racial Differences in Marriage and Employment," Working Papers 1009, Queen's University, Department of Economics. [Downloadable!]
  2. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May. [Downloadable!] (restricted)
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  3. Jay H. Hong & Jose-Victor Rios-Rull, 2004. "Life insurance and household consumption," Working Papers 04-10, Federal Reserve Bank of Philadelphia. [Downloadable!]
  4. Martin Browning & Pierre-AndrŽe Chiappori & Arthur Lewbel, 2004. "Estimating Consumption Economies of Scale, Adult Equivalence Scales, and Household Bargaining Power," Boston College Working Papers in Economics 588, Boston College Department of Economics, revised 04 Sep 2006. [Downloadable!]
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  5. Haddad, Lawrence & Kanbur, Ravi, 1990. "How Serious Is the Neglect of Intra-Household Inequality?," Economic Journal, Royal Economic Society, vol. 100(402), pages 866-81, September. [Downloadable!] (restricted)
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  6. Vermeulen, Frederic, 2002. " Collective Household Models: Principles and Main Results," Journal of Economic Surveys, Blackwell Publishing, vol. 16(4), pages 533-64, September. [Downloadable!] (restricted)
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  7. Barrett, Garry F & Crossley, Thomas F & Worswick, Christopher, 2000. "Consumption and Income Inequality in Australia," The Economic Record, The Economic Society of Australia, vol. 76(233), pages 116-38, June.
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  8. Browning, Martin & Francois Bourguignon & Pierre-Andre Chiappori & Valerie Lechene, 1994. "Income and Outcomes: A Structural Model of Intrahousehold Allocation," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1067-96, December. [Downloadable!] (restricted)
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  9. Pierre-Andre Chiappori & Bernard Fortin & Guy Lacroix, 2002. "Marriage Market, Divorce Legislation, and Household Labor Supply," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 37-72, February. [Downloadable!] (restricted)
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  10. Kanbur, Ravi & Haddad, Lawrence, 1994. "Are Better Off Households More Unequal or Less Unequal?," Oxford Economic Papers, Oxford University Press, vol. 46(3), pages 445-58, July. [Downloadable!] (restricted)
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  11. M. Browning & P. A. Chiappori, 1998. "Efficient Intra-Household Allocations: A General Characterization and Empirical Tests," Econometrica, Econometric Society, vol. 66(6), pages 1241-1278, November.
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  12. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, March. [Downloadable!]
  13. Olivier Donni, 2001. "Collective Female Labor Supply: Theory and Application," Cahiers de recherche CREFE / CREFE Working Papers 141, CREFE, Université du Québec à Montréal. [Downloadable!]
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  14. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier. [Downloadable!] (restricted)
  15. Pierre-André Chiappori & Richard Blundell & Costas Meghir, 2002. "Collective labour supply with children," IFS Working Papers W02/08, Institute for Fiscal Studies. [Downloadable!]
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  16. Erich Battistin, 2002. "Errors in Survey Reports of Consumption Expenditures," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C4-2, International Conferences on Panel Data. [Downloadable!]
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  17. Dirk Krueger & Fabrizio Perri, 2002. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," NBER Working Papers 9202, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-85, November. [Downloadable!] (restricted)
  19. Fernández, Raquel & Rogerson, Richard, 2000. "Sorting and Long-Run Inequality," CEPR Discussion Papers 2352, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  20. Manser, Marilyn & Brown, Murray, 1980. "Marriage and Household Decision-Making: A Bargaining Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 31-44, February. [Downloadable!] (restricted)
  21. Thomas F. Crossley & Krishna Pendakur, 2002. "Consumption Inequality," Department of Economics Working Papers 2002-09, McMaster University. [Downloadable!]
  22. Richard Blundell & Pierre-Andre Chiappori & Thierry Magnac & Costas Meghir, 2002. "Collective Labor Supply: Heterogeneity and Nonparticipation," Research Unit Working Papers 0210, Laboratoire d'Economie Appliquee, INRA. [Downloadable!]
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  23. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January. [Downloadable!] (restricted)
  24. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Pencavel, 2006. "Earnings Inequality and Market Work in Husband-Wife Families," IZA Discussion Papers 2235, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Olivier Donni, 2004. "Labor Supply, Home Production and Welfare Comparisons," Cahiers de recherche 0427, CIRPEE. [Downloadable!]
    Other versions:
  3. Rob Alessie & Thomas F. Crossley & Vincent Hildebrand, 2006. "Estimating a Collective Household Model with Survey Data on Financial Satisfaction," Quantitative Studies in Economics and Population Research Reports 409, McMaster University. [Downloadable!]
    Other versions:
  4. Bargain, Olivier, 2004. "Normative Evaluation of Tax Policies: From Households to Individuals," IZA Discussion Papers 1441, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Arthur Lewbel & Krishna Pendakur, 2008. "Estimation of Collective Household Models With Engel Curves," Boston College Working Papers in Economics 694, Boston College Department of Economics. [Downloadable!]
    Other versions:
  6. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Jay H. Hong & Jose-Victor Rios-Rull, 2004. "Life insurance and household consumption," Working Papers 04-10, Federal Reserve Bank of Philadelphia. [Downloadable!]
  8. Eugene Choo & Shannon Seitz & Aloysius Siow, 2008. "The Collective Marriage Matching Model: Identification, Estimation and Testing," Working Papers tecipa-340, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  9. Rizwana Siddiqui, 2007. "Modelling Gender Dimensions of the Impact of Economic Reforms in Pakistan," Cahiers de recherche MPIA 2007-13, PEP-MPIA. [Downloadable!]
  10. Helene Couprie & Eugenio Peluso & Alain Trannoy, 2007. "From Household to Individual Welfare Comparisons: A Double Concavity Test," IDEP Working Papers 0701, Institut d'economie publique (IDEP), Marseille, France, revised 01 2007. [Downloadable!]
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