Consumption Growth and Inequality in a Heterogeneous Agent Model: Theory and Evidence from German Data

This paper studies the structure and dynamics of consumption and consumption growth inequality. The theoretical framework is a heterogeneous agent model with stochastic labor endowments, where the group mean consumption serves as consumption externality. The main finding is that households' preferences affect the within-group inequality through asset holding decisions: it decreases with groups' degree of patience, and increases with households' eagerness to keep up with the group average. The relationship between the group average consumption growth and within-group inequality predicted by the model is shown as slightly positive yet significant in a synthesis study combining the German Socio-Economic Panel (GSOEP) and the Einkommens- und Verbrauchsstichprobe (EVS). Age and household size are crucial for within-group inequality, as young and/or small households are more sensitive to income and consumption shocks. Large and well-educated households with unskilled jobs have undergone surprisingly inferior performance in consumption growth and growth variance. Moreover, the data also shows increases of within-group inequality directly after the reunification and the introduction of the euro.