Price search, consumption inequality, and expenditure inequality over the life cycle

Arslan, Yavuz and Taskin, Temel (2011): Price search, consumption inequality, and expenditure inequality over the life cycle.

Abstract

In this paper, we incorporate a price search decision into a life cycle model and differentiate consumption from expenditure. Consumers with low wealth and bad income shocks search more for cheaper prices and pay less, which makes their consumption higher than in a model without search option. A plausibly calibrated version of our model predicts that the cross-sectional variance of consumption is about 17% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role for lower-income people to increase their consumption levels. We discuss other implications of price search over the life cycle as well.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumption inequality, price search, incomplete markets, life cycle models, partial insurance
• Subjects: D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; D - Microeconomics > D1 - Household Behavior and Family Economics > D10 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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