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Consumption Inequality and Discount Rate Heterogeneity

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Listed author(s):
  • Gang Sun

    ()

    (University of St Andrews)

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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.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201311.

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Date of creation: 01 Nov 2013
Handle: RePEc:san:cdmawp:1311
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School of Economics and Finance, University of St. Andrews, Fife KY16 9AL

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Keywords: consumption inequality discount rate heterogeneity life cycle risk sharing;

Other versions of this item:

Find related papers by JEL classification:
  • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
  • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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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.

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