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23 Nov 17

Consumption Inequality across Heterogeneous Families.

Authors: THELOUDIS Alexandros.

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.

Reference: THELOUDIS Alexandros. Consumption Inequality across Heterogeneous Families. LISER, 2017, Working Papers n°2017-18, 64 p.

Keywords:
unobserved preference heterogeneity,
consumption inequality,
family labor supply,
wage shocks,
lifecycle model,
liquidity constraints,
adjustment costs,
PSID