2017-01: The saturation of spending diversity and the truth about Mr Brown and Mrs Jones (Working paper)

Abstract

Several cross country studies show that rising household income leads to consumption spending being spread more evenly across different spending categories(Clements et al., 2006). We argue that this result is likely due to aggregation. Using more disaggregated UK household level spending data, we show that the spending diversity of households only rises up to a certain income level and then starts to decline as households concentrate more of their spending on particular expenditure categories that differ across households. It is precisely because of this growing heterogeneity on the household level that the average spending diversity of the population can nevertheless always rise in income. We build a model to capture this observed pattern and use it to show how the welfare judgements derived from studying a representative household become relatively more inaccurate when household income rises.