DP6051 Consumption Smoothing and Income Redistribution

Author(s): Giuseppe Bertola , Winfried Koeniger

Publication Date: January 2007

Keyword(s): borrowing constraints , consumer credit

JEL(s): d23 , E21

Programme Areas: International Macroeconomics , Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP6051.asp.asp

We show theoretically that income redistribution benefits borrowing-constrained individuals more than is implied by standard relative-income and uninsurable-risk considerations. Empirically, we find in international opinion-survey data that younger and lower-income individuals express stronger support for government redistribution in countries where consumer credit is less easily available. This evidence supports our theoretical perspective if such individuals are more strongly affected by tighter credit supply, in that expectations of higher incomes in the future increase their propensity to borrow.