Does income inequality lead to consumption equality? evidence and theory

Dirk Krueger and Fabrizio Perri

No 363, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Using data from the Consumer Expenditure Survey, we first document that the recent increase in income inequality in the United States has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which has increased significantly for income but little for consumption. We then develop a simple framework that allows us to analytically characterize how within-group income inequality affects consumption inequality in a world in which agents can trade a full set of contingent consumption claims, subject to endogenous constraints emanating from the limited enforcement of intertemporal contracts (as in Kehoe and Levine, 1993). Finally, we quantitatively evaluate, in the context of a calibrated general equilibrium production economy, whether this setup, or alternatively a standard incomplete markets model (as in Aiyagari, 1994), can account for the documented stylized consumption inequality facts from the U.S. data.

Keywords: Income distribution; Consumption (Economics) (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (27)

Published in Review of Economic Studies> (Vol. 73, No. 1, January 2006, pp. 163-193)

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Related works:
Working Paper: Does income inequality lead to consumption inequality? Evidence and theory (2005)
Working Paper: Does Income Inequality Lead to Consumption Inequality? Evidence and Theory (2002)
Working Paper: Does Income Inequality Lead to Consumption Inequality? Evidence and Theory (2002)
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