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| Lhakpa Sherpa and Brad Sturgill |
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| ''Keeping up with the Joneses and the effect of income inequality on consumption inequality'' |
| ( 2026, Vol. 46 No.2 ) |
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| Different measures show that income inequality has been rising in the US in the recent decades. However, in a recent paper, Krueger and Perri (2006) document that consumption inequality has not grown to the same extent. They also show that a standard incomplete market model overstates the extent of rise in consumption inequality, and suggest that market completeness in the form of state-contingent securities can help bridge the gap between data and model. Differently from them, we propose an alternative mechanism to explain the lack of rise in consumption inequality. In particular, we incorporate household preferences that depend on consumption relative to average consumption levels (also known as ``keeping up with the Joneses" preferences) in a standard incomplete markets model. Using numerical examples, we find that this channel can potentially explain the pattern of consumption inequality observed in the data. |
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| Keywords: Income inequality, consumption inequality, Incomplete market models, aggregative models |
JEL: E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
D3 - Distribution: General |
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| Manuscript Received : Jul 13 2026 | | Manuscript Accepted : Jun 30 2026 |
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