Distribution Effects and the Aggregate Consumption Function

This paper investigates whether and how the distribution of income affects the fraction of disposable income which is consumed. It is shown that a slight generalization of the permanent income or "life-cycle" model of consumption makes each individual's lifetime marginal propensity to consume a fraction of his lifetime disposable resources unless two taste parameters are equal. In considering what this implies for the aggregate consumption function, the tenuous connection between theoretical constructs and observed facts is stressed. Previous empirical work on the subject is criticized for failing to define properly either "income distribution" or "consumption," and a new test, based on the theory, is outlined. Because of data limitations, a number of compromises with this ideal test must be made, and several alternative models are estimated. On the whole, they suggest that equalizing the distribution of income would either leave aggregate consumption unchanged or diminish it slightly.