Details

Autor(en) / Beteiligte

• Almås, Ingvild
• Kjelsrud, Anders

Titel

Rags and Riches: Relative Prices, Non-Homothetic Preferences, and Inequality in India

Ist Teil von

• World development, 2017-09, Vol.97, p.102-121

Ort / Verlag

Oxford: Elsevier Ltd

Erscheinungsjahr

2017

Link zum Volltext

Quelle

PAIS Index

Beschreibungen/Notizen

• •Relative price changes affect rich and poor consumers differently.•We propose a framework to measure cost of living that allows for non-homothetic preferences.•Our estimated trends in real consumption inequality in India differ significantly from conventional measures.•About one third of the rise in inequality in India during 1993–94 and 2004–05 disappears once we account for non-homotheticity. It is well known that consumption patterns change with income. Relative price changes would therefore affect rich and poor consumers differently. Yet, the standard price indices are not income-specific, and hence, they cannot account for such differences. In this paper, we study consumption inequality in India, while fully allowing for non-homotheticity. We show that the relative price changes during most of the period from 1993 to 2012 were pro-poor, in the sense that they favored the poor relative to the rich. As a result, we also find that conventional measures significantly overstate the rise in real consumption inequality during this period. The main lesson from our study is the importance of accounting for non-homotheticity when measuring inequality. The price index literature has, as of yet, paid relatively little attention to this. In our application, however, it turns out that the allowance for non-homotheticity is quantitatively much more important than much discussed adjustments, such as those for substitution in consumption.