Does Inequality Affect the Needs of the Poor?

Abstract

We investigate how inequality affects what is considered most necessary to purchase. Using consumption surveys of frequent purchases from poor households in India, we estimate a structural model of demand to isolate the impact of inequality on needs from supply-side effects. We rely on plausibly exogenous inequality shocks following the 1991 liberalization reforms. We find that inequality increases the need of the poor for "little luxuries" (sweets, processed food and drinks, intoxicants), which generates significant expenditure reallocation at the expense of calorie intake. This accounts for three fourth of the decline in calorie consumption of the poor over the period.

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

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