Consumption Inequality and Partial Insurance

TLDR

The paper examines the link between income and consumption inequality. The authors construct panel consumption data from the Panel Study of Income Dynamics using an imputation procedure based on food demand estimates from the Consumer Expenditure Survey. They find that income and consumption inequality diverged during the 1980s because of increased persistence of income shocks, with partial insurance of permanent shocks for college‑educated and near‑retirement households, full insurance of transitory shocks except among the poor, and a key role for taxes, transfers, and family labor supply in mitigating permanent shocks. JEL codes: D12, D31, D91, E21.

Abstract

This paper examines the link between income and consumption inequality. We create panel data on consumption for the Panel Study of Income Dynamics using an imputation procedure based on food demand estimates from the Consumer Expenditure Survey. We document a disjuncture between income and consumption inequality over the 1980s and show that it can be explained by changes in the persistence of income shocks. We find some partial insurance of permanent shocks, especially for the college educated and those near retirement. We find full insurance of transitory shocks except among poor households. Taxes, transfers, and family labor supply play an important role in insuring permanent shocks. (JEL D12, D31, D91, E21)