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Consumption Inequality and Discount Rate Heterogeneity

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  • Sun, Gang

Abstract

Although standard incomplete market models can account for the magnitude of the rise in consumption inequality over the life cycle, they generate unrealistically concave age pro.les of consumption inequality and unrealistically less wealth inequality. In this paper, I investigate the role of discount rate heterogeneity on consumption inequality in the context of incomplete market life cycle models. The distribution of discount rates is estimated using moments from the wealth distribution. I .nd that the model with heterogeneous income pro.les (HIP) and discount rate heterogeneity can successfully account for the empirical age pro.le of consumption inequality, both in its magnitude and in its non-concave shape. Generating realistic wealth inequality, this simulated model also highlights the importance of ex ante heterogeneities as main sources of life time inequality.

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  • Sun, Gang, 2013. "Consumption Inequality and Discount Rate Heterogeneity," SIRE Discussion Papers 2013-97, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:522
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    File URL: http://hdl.handle.net/10943/522
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    Cited by:

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    3. Gang Sun, 2015. "Complete Markets Strikes Back: Is the Reduced-form Measure of Consumption Insurance Reliable?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 921-930, October.

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    Keywords

    consumption inequality; discount rate heterogeneity; life cycle; risk sharing; incomplete market;
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