PI: Prices and Inequality

While wealth inequality and income inequality have been studied extensively, little is known about the impact of prices on inequality. PI will put prices and consumption at the core of the study of inequality, proceeding in three steps. First, PI will develop new price indices when consumer preferences change with income, which will constitute the theoretical backbone for the rest of the project, and which could be adopted by statistical agencies going forward. The stakes are high: the new non-homothetic price index will change the measurement of inequality as well as of long-run income growth and cross-country comparisons of living standards. It will also have practical implications such as the indexation of the poverty line and better targeting of social transfers. Second, PI will leverage "big data" to provide policymakers with a comprehensive picture of inflation inequality by (i) gathering an international database of credit card data allowing to compute inflation inequality in twenty countries, (ii) collecting micro price and expenditure datasets covering all important sectors in the United States, (iii) using machine learning techniques to run new hedonic regressions for services, and (iv) estimating a new housing inflation index to address existing biases. These new datasets and techniques will be shared with the scientific community via a project website to maximize impact. Third, PI aims to bring about a revolution in public economics theory by relaxing the assumptions of the current paradigm, by incorporating the production side of the economy and endogenous prices back into optimal tax policy design. This approach highlights the interaction between production and consumption and the importance of heterogeneous inflation rates. The comprehensive micro datasets from the second part of PI will be used to discipline models of price incidence. PI thus goes far beyond measurement and will yield improved models of price incidence and optimal policy.