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Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle

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  • Yavuz Arslan
  • Temel Taskin

Abstract

In this paper, we incorporate a price search decision into an incomplete markets model and differentiate consumption from expenditure. In our model, consumers are allowed to allocate part of their time on searching for low prices which leads to an endogenous price dispersion. A plausibly calibrated version of the model predicts that the cross-sectional variance of consumption is, on average, 15% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role and provides a partial insurance mechanism against bad income shocks. We also discuss some policy implications.

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File URL: http://www.tcmb.gov.tr/research/teblig/abstract/wp1212_tr.php
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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1212.

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Date of creation: 2012
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Handle: RePEc:tcb:wpaper:1212

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Keywords: Consumption inequality; price search; incomplete markets; life cycle models; partial insurance;

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  1. Greg Kaplan, 2007. "Inequality and the Lifecycle," 2007 Meeting Papers 262, Society for Economic Dynamics.
  2. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
  3. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative Macroeconomics with Heterogeneous Households," NBER Working Papers 14768, National Bureau of Economic Research, Inc.
  4. Fatih Karahan & Serdar Ozkan, 2009. "On the Persistence of Income Shocks over the Life Cycle: Evidence and Implications," PIER Working Paper Archive 09-045, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. Fatih Guvenen, 2007. "An empirical investigation of labor income processes," IFS Working Papers W07/13, Institute for Fiscal Studies.
  6. 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.
  7. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April.
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