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Significant departures from log normality are observed in income data, in violation of Gibrat's law. We identify a new empirical regularity, which is that the distribution of consumption expenditures across households is, within cohorts, closer to log normal than the distribution of income. We explain these empirical results by showing that the logic of Gibrat's law applies not to total income, but to permanent income and to maginal utility. These findings have important implications for welfare and inequality measurement, aggregation, and econometric model analysis.
Authors
Erich Battistin
CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
Research Associate Boston College
Arthur is a Research Associate of the IFS and holds the Barbara A. and Patrick E. Roche chair in economics at Boston College.
Working Paper details
- DOI
- 10.1920/wp.ifs.2007.0708
- Publisher
- IFS
Suggested citation
E, Battistin and R, Blundell and A, Lewbel. (2007). Why is consumption more log normal than income? Gibrat's law revisited. London: IFS. Available at: https://ifs.org.uk/publications/why-consumption-more-log-normal-income-gibrats-law-revisited (accessed: 11 May 2024).
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