Working Paper: NBER ID: w23101
Authors: Benjamin Faber; Thibault Fally
Abstract: A growing literature has documented the role of firm heterogeneity within sectors for nominal income inequality. This paper explores the implications for household price indices across the income distribution. Using detailed matched US home and store scanner microdata, we present evidence that rich and poor households source their consumption from different parts of the firm size distribution within disaggregated product groups. We use the data to examine alternative explanations, propose a tractable quantitative model with two-sided heterogeneity that rationalizes the observed moments, and calibrate it to explore general-equilibrium counterfactuals. We find that larger, more productive firms endogenously sort into catering to the taste of richer households, and that this gives rise to asymmetric effects on household price indices. We quantify these effects in the context of policy counterfactuals that affect the distribution of disposable incomes on the demand side or profits across firms on the supply side.
Keywords: Firm heterogeneity; Consumption baskets; Income inequality; Price indices; General equilibrium
JEL Codes: E31; F61; O51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rich households sourcing consumption from larger firms (D16) | higher budget shares for rich households (H31) |
| poor households sourcing consumption from smaller firms (D19) | lower budget shares for poor households (H53) |
| larger firms catering to tastes of richer households (D12) | asymmetric effects on household price indices (C43) |
| richest 20% sourcing from higher quality producers (L66) | lower quality-adjusted prices for richest 20% (I14) |
| richest 20% sourcing from higher quality producers (L66) | higher quality for richest households (D19) |
| asymmetric effects on household price indices (C43) | differences in consumption patterns between rich and poor households (D12) |