Detecting a change in wealth concentration without the knowledge of the wealth distribution

Abstract

Consumption is commonly used as a proxy for permanent income. We go a step further by establishing the link between the distribution of consumption and that of permanent income in terms of dominance orderings. We introduce two new dominance orderings, the Generalized Top Lorenz test and the related affluence ordering. If consumption is a concave function of permanent income, we get an indirect and robust method to detect a change in permanent income concentration when the full stream of income receipts along the life cycle is unknown and only consumption data are available. Our application on US data for the period 1980-2002 points out the difficult start in life of people belonging to the "Baby loser generation" (people born in the sixties) with respect to the previous and following cohort. © 2010 Springer Science+Business Media, LLC.