Intertemporal Choice and Inequality

59 Pages Posted: 17 Oct 2007

See all articles by Angus Deaton

Angus Deaton

Princeton University; National Bureau of Economic Research (NBER)

Christina Paxon

Princeton University - Woodrow Wilson School of Public and International Affairs

Date Written: April 1993

Abstract

We show that standard models of intertemporal choice, including the permanent income hypothesis, imply that for any given cohort of people born at the same time, inequality in both consumption and income will grow with age. At any given date, each individual's consumption depends on the integral of unanticipated earnings shocks up to that date, so that consumption becomes more dispersed with time. If earnings are not themselves similarly dispersing, assets will do so, so that the dispersion of total income will increase, irrespective of the behavior of earnings. Because the result applies to an increase in inequality over time within a given age cohort, it has no immediate implications for the behavior of inequality in the economy as a whole, and is consistent with constant aggregate inequality over time. Cohort data are constructed from 11 years of household survey data from the U.S., 22 years from Great Britain, and 14 years from Taiwan. They show that within-cohort consumption and income inequality does indeed grow with age in all three economies, and that the rate of increase is broadly similar in all three.

Suggested Citation

Deaton, Angus S. and Paxon, Christina, Intertemporal Choice and Inequality (April 1993). NBER Working Paper No. w4328, Available at SSRN: https://ssrn.com/abstract=478734

Angus S. Deaton (Contact Author)

Princeton University ( email )

Woodrow Wilson School
Princeton, NJ 08544
United States
609-258-5967 (Phone)
609-258-5974 (Fax)

HOME PAGE: http://www.wws.princeton.edu/~deaton

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Christina Paxon

Princeton University - Woodrow Wilson School of Public and International Affairs

Princeton University
Princeton, NJ 08544-1021
United States

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