Consumption inequality across heterogeneous families

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Abstract

What does preference heterogeneity imply for consumption inequality? This paper studies the link from wage to consumption inequality within a lifecycle model of consumption and family labor supply. Its distinctive feature is that households have general heterogeneous preferences over consumption and labor supply. The paper shows identification of the joint distribution of unobserved household preferences separately from the observed distributions of incomes and outcomes. Estimation on data from the Panel Study of In- come Dynamics in the US reveals substantial unexplained heterogeneity in consumption preferences but little unexplained heterogeneity in labor supply preferences. Preference heterogeneity accounts for about a third of consumption inequality in recent years and implies, on average, lower partial insurance of wage shocks compared to recent studies in the literature.
Original languageEnglish
Article number103765
JournalEuropean Economic Review
Volume136
Early online date24 May 2021
DOIs
Publication statusE-pub ahead of print - 24 May 2021

Keywords

  • Unobserved preference heterogeneity
  • Family labor supply
  • Lifecycle model
  • Partial insurance
  • PSID

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