Does Inequality Affect the Needs of the Poor?

Abstract

We investigate how inequality affects what is considered most necessary to purchase. Combining detailed consumption surveys in India with an instrumental variable approach, we first provide evidence that inequality is associated with a decrease in calorie consumption for poor households. This effect is driven by upward comparisons and associated with poor households spending more on luxuries, consistent with relative deprivation theory. We then estimate a structural demand system to isolate the impact of inequality on needs from supply-side effects. We find that inequality increases the need of the poor for "little luxuries" (e.g., dairy products, energy use) at the expense of necessities (e.g., cereals). This shift in the hierarchy of needs accounts for more than two third of the decline in the calorie consumption of the poor over the period.

Keywords: Consumer Theory, Inequality, Needs, Malnutrition, Poverty

JEL Classification: D01, D12, I14, I30, O12