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Consumption Inequality and Discount Rate Heterogeneity

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  • Gang Sun

    () (University of St Andrews)

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 profiles 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 find that the model with heterogeneous income profiles (HIP) and discount rate heterogeneity can successfully account for the empirical age profile 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.

Suggested Citation

  • Gang Sun, 2013. "Consumption Inequality and Discount Rate Heterogeneity," CDMA Working Paper Series 201311, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmawp:1311
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    Cited by:

    1. 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.

    More about this item

    Keywords

    consumption inequality discount rate heterogeneity life cycle risk sharing;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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