Consumption Inequality in the Digital Age

Abstract

This paper studies how digitalization affects consumption inequality. While previous literature has documented that technological change leads to U-shaped income polarization, we show that this pattern does not translate into consumption or welfare. This is due to price changes that are more beneficial for richer households. By assembling a novel dataset of digital technology in consumption, we establish several new stylized facts: First, high-income households consume a larger share of digitally produced products. Second, consumption items that rely more on digital inputs witness lower price inflation. Third, high-income households spend a larger share of their time on digital-intensive activities. Building on these findings, we present a structural model that quantifies the impact of digitalization on consumption inequality. The model weighs U-shaped income polarization against inflation rates that decrease with income. As a result, the welfare response to digitalization is J-shaped.

Keywords: Digitalization, inequality, consumption, income, automation

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