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Why is consumption more log normal than income? Gibrat's law revisited

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Listed:
  • Erich Battistin

    (Institute for Fiscal Studies)

  • Richard Blundell

    (Institute for Fiscal Studies and University College London)

  • Arthur Lewbel

    (Institute for Fiscal Studies and Boston College)

Abstract

Significant departures from log normality are observed in income data, in violation of Gibrat's law. We identify a new empirical regularity, which is that the distribution of consumption expenditures across households is, within cohorts, closer to log normal than the distribution of income. We explain these empirical results by showing that the logic of Gibrat's law applies not to total income, but to permanent income and to maginal utility. These findings have important implications for welfare and inequality measurement, aggregation, and econometric model analysis.

Suggested Citation

  • Erich Battistin & Richard Blundell & Arthur Lewbel, 2007. "Why is consumption more log normal than income? Gibrat's law revisited," IFS Working Papers W07/08, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:07/08
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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