IntertemporalChoiceandInequality-PrincetonUniversity.pdfVIP

Intertemporal Choice and Inequality Angus Deaton and ChristinaPaxson Princeton University The permanent income hypothesis implies that, for any cohort of people born at the same time, inequality in both consumption and income should grow with age. We investigate this prediction using cohort data constructed from 11 years of household survey data from the United States, 22 years from Great Britain, and 14 years from Taiwan. The data show that within-cohort consumption and income inequality measures do indeed increase with age in the three economies and that the rate of increase is similar in all three. Ac- cording to the permanent income hypothesis, the increase in in- equality reflects cumulative differences in the effects of luck on con- sumption. Other models of intertemporal choice-such as those with strong precautionary motives or liquidity constraints-can limit or even prevent the spread of inequality, as can insurance arrange- ments that share risk across individuals. The evidence on the spread of inequality can therefore be used to help quantify the extent to which private and social arrangements moderate the impact of risk on the distribution of individual welfare. I. Introduction Suppose that the permanent income hypothesis (PIH) is true, so that the consumption of each person in the economy follows a random We are grateful to James Banks and Richard Blundell for the cohort data for Great Britain and to Orazio Attanasio for the U.S. data that were used in an earlier version of this paper. We also thank