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Coibion, Gorodnichenko and Koustas (2017)

In a recent paper (pdf), Olivier Coibion, Yuriy Gorodnichenko and Dmitri Koustas argue that how often we shop matters for measuring consumption inequality.

Inequality is in the focus of researchers at the moment. But usually researchers focus on inequality in income or wealth. But people probably care more about consumption than their income, so it would be good to know how consumption inequality has evolved.1 That, however, is more difficult to measure. While for income and wealth researchers can rely on some tax data, administrative data or plausible self-reported numbers, it’s hard to keep track of a person’s consumption.

The two common ways of measuring people’s consumption are (1) monthly interviews and (2) daily diaries. Consumption inequality as measured by (1) has not risen, but has increased strongly as measured by (2).

The authors’ idea of why shopping frequency matters is straightforward: The problem is that consumption is not the same as expenditures, as some goods are more durable than others. Expenditures are what we can measure and consumption is unobserved.

Some products (like toilet paper) we only buy infrequently and in bulk. So a dataset on daily toilet paper expenditures would have zeros for most people and ones for a few. So at any point in time it would look as if some people consume very much toilet paper and others none and this would imply very unequal consumption. We spend on items like food and coffee more frequently, so buying and consumption happen at times not far apart.

The authors show that people in the U.S. shop less often than they used to and argue that when you adjust for this fact, then consumption inequality has remained flat. They conclude that measuring expenditures over much longer timespans (so not days but months or quarters) is important.

Coibion et al. attribute the reduced frequency of purchases to the rise of club/warehouse stores (e.g. Wallmart). They also discuss other possible reasons for why people shop less: If people earn higher wages, then the opportunity costs of shopping might have increased. Also, houses are larger now and fridges and freezers have higher quality, so the cost of storage might have decreased.

With more online shopping, people might start buying things much more frequently again. The authors argue that this might reverse the existing trend in the mismeasurement of consumption inequality.

  1. Ideally, we would measure “utility inequality”, but that’s almost impossible.