Has consumption inequality mirrored income inequality: new evidence from a Korean household panel

We examine how consumption inequality tracks income inequality in a Korean household panel. To adjust for measurement errors in consumption, we employ the double-differencing correction of Aguiar and Bils (2015) (AB hereafter). In the first stage of the double-differencing, AB used current income as an instrument for unobserved true total expenditure, and we use permanent income as the instrument instead. For the U.S. Consumer Expenditure Survey data, AB found that after correcting for measurement errors, consumption inequality tracks income inequality more closely. We find that the same conclusion holds for the Korean panel data and the estimate of consumption inequality is robust to the choice of instrument for the total expenditure in the first stage regression.