Price Search, Consumption Inequality and Expenditure Inequality over the Life Cycle

Price Search, Consumption Inequality and Expenditure Inequality over the Life Cycle

Title : Price Search, Consumption Inequality and Expenditure Inequality over the Life Cycle
Number : 12/12
Author(s) : Yavuz Arslan, Temel Taşkın
Language : English
Date : March 2012
Abstract : In this paper, we incorporate a price search decision into an incomplete markets model and differentiate consumption from expenditure. In our model, consumers are allowed to allocate part of their time on searching for low prices which leads to an endogenous price dispersion. A plausibly calibrated version of the model predicts that the cross-sectional variance of consumption is, on average, 15 percent smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role and provides a partial insurance mechanism against bad income shocks. We also discuss some policy implications.
Keywords : Consumption inequality, Price search, Incomplete markets, Life cycle models, Partial insurance
JEL Codes : D10; D91; E21

Price Search, Consumption Inequality and Expenditure Inequality over the Life Cycle
CENTRAL BANK OF THE REPUBLIC OF TURKEY Head Office Anafartalar Mah. İstiklal Cad. No:10 06050 Ulus Altındağ Ankara Phone : (+90 312) 507 50 00 | Fax : (+90 312) 507 56 40