Consumption Inequality in the Digital Age

Abstract

This paper studies the effect of digitalization on consumption inequality. We assemble a novel dataset of digital technology in the consumption basket of US households and establish a new stylized fact: High-income households have a higher consumption share of digital products than low-income households. Building on this finding, we present a structural model in which digitalization affects consumption inequality in two ways: By a polarization of incomes and by a decline in the relative price of digital goods. Both channels work in favor of high-income households. Calibrating the model to the US economy between 1960 and 2017, we demonstrate that the price channel has sizeable welfare effects and explains 22.5% of the increase in consumption inequality.

Keywords: Digitalization, inequality, consumption, income

JEL Classification: E21, E22, J31, O33, O41