Consumption Growth and Inequality in a Heterogeneous Agent Model: Theory and Evidence from German Data

Runli Xie
Humboldt University of Berlin, Germany

This paper studies the structure and dynamics of consumption and consumption growth inequality. The theoretical framework is a heterogeneous agent model with stochastic labor endowments, where the group mean consumption enters individual households' utility function as consumption externality. The main finding is that households' preferences affect the within-group consumption growth inequality through asset holding decisions; within-group inequality decreases with groups' degree of patience, and increases with households' eagerness to keep up with the group mean. The relationship between the group mean consumption growth and within-group growth inequality predicted by the model equilibrium is shown as slightly positive yet significant, when a synthesis study is carried out using survey data from the German Socio-Economic Panel (GSOEP) and the Einkommens- und Verbrauchsstichprobe (EVS). Age and household size are crucial for within-group inequality, as young and/or small households are more sensitive to income and consumption shocks. Large and well-educated households with unskilled jobs have undergone surprisingly inferior performance in consumption growth and growth variance. Moreover, the data also shows increases of within-group inequality directly after the reunification and the introduction of the euro.

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