Does Inequality Affect the Perception of Needs?

87 Pages Posted: 17 Nov 2018 Last revised: 15 Oct 2021

See all articles by Eve Colson-Sihra

Eve Colson-Sihra

Hebrew University of Jerusalem - Department of Economics

Clement Bellet

Erasmus University Rotterdam (EUR)

Date Written: October 14, 2021

Abstract

This paper investigates how inequality affects what the poor consider necessary to purchase. Using detailed information on the consumption choices of a large sample of poor households in India, we first provide evidence that inequality exposure tends to make luxuries more necessary (their income elasticity decreases). We rely on national inequality shocks that followed the 1991 economic liberalization reforms, and instrument local inequality using a shift-share strategy. We then estimate a structural model of demand where inequality exposure affects perceived needs, taking into account the supply environment. We find that (1) inequality increases the perceived need of the poor for luxuries and (2) this preference shift generates significant expenditure reallocation at the expense of calorie intakes. Counterfactual simulations show that this preference channel accounts for three fourth of the decline in calorie consumption of the poor over the period.

Keywords: Demand Analysis, Inequality, Consumer Behavior, Needs, Malnutrition, Poverty

JEL Classification: D01, D12, I14, I30, O10, Z10

Suggested Citation

Colson-Sihra, Eve and Bellet, Clement, Does Inequality Affect the Perception of Needs? (October 14, 2021). Available at SSRN: https://ssrn.com/abstract=3270814 or http://dx.doi.org/10.2139/ssrn.3270814

Eve Colson-Sihra (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Jerusalem
Israel

Clement Bellet

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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