Topic: “Shopping Frictions and Household Heterogeneity: Theory and Empirics”
Abstract:
This paper shows that price dispersion matters for shaping individual household consumption. Using detailed scanner data, I document that the high-earning employees pay from 2 to 7% higher prices than the low-earning ones for exactly the same or very similar goods. The causal link between the income level and paid prices is established by exploiting a quasi-experimental setup of the Economic Stimulus Act of 2008. Between 8 and 22% ofthe increase in household spending after a transitory income shock is explained by positive changes in the paid prices. Next, I present a novel and tractable theory to study search for consumption as part of the optimal savings problem. Due to retail-market frictions, households have to exert search effort to purchase the consumption goods. The proposed framework reconciles the documented patterns in a quantitatively meaningful way. A counterfactual analysis of the calibrated model shows that over two thirds of all households pay higher prices due to a negative externality generated by shoppers with low search intensity.