PRICE SEARCH, CONSUMPTION INEQUALITY AND EXPENDITURE INEQUALITY OVER THE LIFE -CYCLE

We differentiate consumption from expenditure by incorporating price search decision into an otherwise standard life-cycle model. We first analytically show that, under very general conditions, poorer households search more and pay lower prices compared to wealthier ones. As a result, consumption inequality is smaller than expenditure inequality, and the gap between them increases over the life-cycle. Next, using a plausibly calibrated model, we find that life-cycle increase in consumption inequality is about 30% lower than the increase in expenditure inequality. Price search provides an insurance mechanism against income shocks and increases the welfare of a newborn by 3.9%.