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Mr. Jonathan Becker
PhD Candidate in Economics
New York University

Poor and rich households differ greatly in the mix of products they consume, with the poor allocating a larger share of their spending to relatively inexpensive goods. Moreover, during recessions, households shift spending toward more affordable goods. In this paper, I study an economy with nonhomothetic preferences and endogenously variable markups that is calibrated to match these patterns. I show that in recessions, producers of low-quality goods gain market power and increase markups because consumers shift spending toward more affordable goods. By contrast, producers of higher-quality goods reduce their markups. Observed changes in the expenditure distribution during the Great Recession predict a 6:8-percentage-point increase in the markups of low-quality goods and a 1:8-percentage-point decline in the markups of high-quality products, considerably increasing real consumption inequality. Embedding this mechanism into a Bewley-Aiyagari-Hugget model, I find redistributive policies aimed at alleviating inequality amplify these unequal markup movements. Redistribution to the poor allows lower-quality producers to gain even more market share and to increase markups even further.