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Consumption inequality across heterogeneous families

Author

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  • Alexandros Theloudis

    (Luxembourg Institute for Socio-Economic Research (LISER) and Department of Eco- nomics, University College London)

Abstract
This paper studies the transmission of wage shocks into consumption across families that exhibit unobserved preference heterogeneity. Heterogeneity and preferences over consumption and family labor supply are nonparametric. I show that any moment of the joint distribution of policy-relevant wage elasticities of consumption and labor supply is identified separately from the distributions of incomes and outcomes. I decompose consumption inequality into components pertaining to wage inequality, preference heterogeneity and heterogeneity in wealth, and I show that preference heterogeneity always increases consumption inequality. To illustrate these points empirically, I fit second and third moments of consumption, earnings and wages in the PSID. I find that: (i) the distributions of permanent and transitory wage shocks exhibit strong negative skewness; (ii) there is substantial heterogeneity in consumption elasticities but not in elasticities of labor supply; (iii) consumption is on average fully insured against transitory shocks but tracks permanent shocks much more closely than previously found; moreover, there is substantial heterogeneity in the response of consumption to such shocks involving both the magnitude and the sign of the response; (iv) preference heterogeneity accounts for up to 58\% of consumption inequality in the US since 1999. Seen together, these results suggest that preference heterogeneity has substantial implications for consumption inequality and partial insurance.

Suggested Citation

  • Alexandros Theloudis, 2017. "Consumption inequality across heterogeneous families," Working Papers 451, ECINEQ, Society for the Study of Economic Inequality.
    • Handle: RePEc:inq:inqwps:ecineq2017-451
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    2. Giménez-Nadal, José Ignacio & Molina, José Alberto & Velilla, Jorge, 2022. "Intergenerational correlation of self-employment in Western Europe," Economic Modelling, Elsevier, vol. 108(C).
    3. Kohei Kubota, 2021. "Partial insurance in Japan," The Japanese Economic Review, Springer, vol. 72(2), pages 299-328, April.
    4. Theloudis, Alexandros, 2021. "Consumption inequality across heterogeneous families," European Economic Review, Elsevier, vol. 136(C).
    5. Ali Elminejad & Tomas Havranek & Roman Horvath & Zuzana Irsova, 2023. "Intertemporal Substitution in Labor Supply: A Meta-Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 1095-1113, December.
    6. Ghosh, Anisha & Theloudis, Alexandros, 2023. "Consumption Partial Insurance in the Presence of Tail Income Risk," Other publications TiSEM c8da0a17-57cb-40bf-ab61-6, Tilburg University, School of Economics and Management.
    7. Gimenez-Nadal, José Ignacio & Molina, José Alberto & Velilla, Jorge, 2024. "Commuting, Wages, and Household Behavior," IZA Discussion Papers 17128, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    unobserved preference heterogeneity; consumption inequality; family labor sup- ply; wage shocks; lifecycle model; liquidity constraints; adjustment costs; PSID.;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D30 - Microeconomics - - Distribution - - - General
    • 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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