Price Search, Consumption Inequality, and Expenditure Inequality Over the Life Cycle

Center for Applied Economics and Policy Research, CAEPR Working Paper #2017-015

38 Pages Posted: 5 Dec 2017 Last revised: 23 Jun 2020

See all articles by Yavuz Arslan

Yavuz Arslan

Bank for International Settlements (BIS)

Bulent Guler

Indiana University Bloomington - Department of Economics

Temel Taskin

World Bank

Date Written: August 30, 2016

Abstract

In this paper, we differentiate consumption from expenditure by incorporating price search decision into an otherwise standard life-cycle model. In our model, households can pay lower prices for the same consumption good if they allocate more time for price search. We first analytically show that under very general conditions, poorer (both income and wealth) 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, we quantify these mechanisms by calibrating our model to the US data. We find that the life-cycle increase in consumption inequality is about 30 percent lower than the increase in expenditure inequality. We also show that the availability of price search option provides a large insurance mechanism against adverse income shocks and increases the welfare of a new born by 3.9 percent in consumption equivalent terms.

Keywords: consumption inequality, price search, incomplete markets, life cycle models, partial insurance

JEL Classification: D10, D91, E21

Suggested Citation

Arslan, Yavuz and Guler, Bulent and Taskin, Temel, Price Search, Consumption Inequality, and Expenditure Inequality Over the Life Cycle (August 30, 2016). Center for Applied Economics and Policy Research, CAEPR Working Paper #2017-015, Available at SSRN: https://ssrn.com/abstract=3080418 or http://dx.doi.org/10.2139/ssrn.3080418

Yavuz Arslan

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Bulent Guler (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-7791 (Phone)

HOME PAGE: http://mypage.iu.edu/~bguler/

Temel Taskin

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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