|
Archive@NYU >
Stern School of Business >
Salomon Center >
Macro Finance >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27337
|
| Title: | Does Income Inequality Lead to Consumption Inequality? Evidence and Theory |
| Authors: | Krueger, Dirk
Perri, Fabrizio |
| Keywords: | Limited Enforcement
Risk Sharing
Consumption Inequality |
| Issue Date: | Aug-2002 |
| Series/Report no.: | S-MF-02-07 |
| Abstract: | This paper first documents the evolution of the cross-sectional income
and consumption distribution in the US in the past 25 years. Using data
from the Consumer Expenditure Survey we find that a rising income
inequality has not been accompanied by a corresponding rise in
consumption inequality. Over the period from 1972 to 1998 the standard
deviation of the log of after-tax labor income has increased by 20%
while the standard deviation of log consumption has increased less than
2%. Furthermore income inequality has increased both between and within
education groups while consumption inequality has increased between
education groups but mildly declined within groups. We then argue that
these empirical findings are consistent with the hypothesis that an
increase in income volatility has been an important cause of the
increase in income inequality, but at the same time has lead to an
endogenous development of credit markets, allowing households to better
smooth their consumption against idiosyncratic income fluctuations. We
develop a consumption model in which the sharing of income risk is
limited by imperfect enforcement of credit contracts and in which the
development of financial markets depends on the volatility of the
individual income process. This model is shown to be quantitatively
consistent with the joint evolution of income and consumption inequality
in US, while other commonly used consumption models are not. |
| URI: | http://hdl.handle.net/2451/27337 |
| Appears in Collections: | Macro Finance
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
