Consumption Quality and Employment Across the Wealth Distribution

Domenico Ferraro, Arizona State University and Vytautas Valaitis, University of Surrey

In the United States, market hours worked are approximately flat across the wealth distribution. Accounting for this phenomenon is a standing challenge for standard heterogeneous-agent macro models. In these models, wealthier households consume more and work fewer hours. We propose a theory that generates the cross-sectional wealth-hours relation as in the data. We quantify this theory in a heterogeneous-agent incomplete-markets model with three key features: a quality choice in consumption, non-homothetic preferences, and a multi-sector production structure. We show that the model produces consumption expenditure patterns consistent with the data and realistic “quality Engel curves.”