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PRICE SEARCH, CONSUMPTION INEQUALITY AND EXPENDITURE INEQUALITY OVER THE LIFE ‐CYCLE
Author(s) -
Arslan Yavuz,
Guler Bulent,
Taskin Temel
Publication year - 2021
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12488
Subject(s) - economics , consumption (sociology) , inequality , welfare , business cycle , economic inequality , consumer expenditure survey , econometrics , macroeconomics , mathematics , aggregate expenditure , mathematical analysis , social science , sociology , market economy
Abstract We differentiate consumption from expenditure by incorporating price search decision into an otherwise standard life‐cycle model. We first analytically show that, under very general conditions, poorer households search more and pay lower prices compared to wealthier ones. As a result, consumption inequality is smaller than expenditure inequality, and the gap between them increases over the life‐cycle. Next, using a plausibly calibrated model, we find that life‐cycle increase in consumption inequality is about 30% lower than the increase in expenditure inequality. Price search provides an insurance mechanism against income shocks and increases the welfare of a newborn by 3.9%.