TY - JOUR
AU - Deaton, Angus
AU - Paxson, Christina
TI - Intertemporal Choice and Inequality
JF - National Bureau of Economic Research Working Paper Series
VL - No. 4328
PY - 1993
Y2 - April 1993
DO - 10.3386/w4328
UR - http://www.nber.org/papers/w4328
L1 - http://www.nber.org/papers/w4328.pdf
N1 - Author contact info:
Angus Deaton
Woodrow Wilson School
127 Julis Romo Rabinowitz Building
Princeton University
Princeton, NJ 08544-1013
Tel: 609/258-5967
Fax: 609/258-5974
E-Mail: deaton@princeton.edu
Christina Paxson
Office of the President
Brown University
Box 1860
Providence, RI 02912
Tel: 401/863-1979
E-Mail: christina_paxson@brown.edu
AB - 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.
ER -