@techreport{6712eae3424341288f66a093f70a80e2,
title = "Consumption Inequality across Heterogeneous Families",
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.",
keywords = "PSID, adjustment costs, consumption inequality, family labor supply, lifecycle model, liquidity constraints, unobserved preference heterogeneity, wage shocks",
author = "Alexandros Theloudis",
year = "2017",
language = "English",
series = "Working Papers",
publisher = "LISER",
number = "2017-18",
address = "Luxembourg",
type = "WorkingPaper",
institution = "LISER",
}