Price search, consumption inequality, and expenditure inequality over the life cycle
AbstractIn this paper, we incorporate a price search decision into a life cycle model and differentiate consumption from expenditure. Consumers with low wealth and bad income shocks search more for cheaper prices and pay less, which makes their consumption higher than in a model without search option. A plausibly calibrated version of our model predicts that the cross-sectional variance of consumption is about 17% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role for lower-income people to increase their consumption levels. We discuss other implications of price search over the life cycle as well.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 34874.
Date of creation: 01 Jul 2011
Date of revision:
Consumption inequality; price search; incomplete markets; life cycle models; partial insurance;
Other versions of this item:
- Yavuz Arslan & Temel Taskin, 2012. "Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle," Working Papers 1212, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- D10 - Microeconomics - - Household Behavior - - - General
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-DGE-2011-12-13 (Dynamic General Equilibrium)
- NEP-IAS-2011-12-13 (Insurance Economics)
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