Expenditure heterogeneity, income shocks, and redistributive policies: theory and evidence from italian data

This study presents a review of contributions investigating how household consumption responds to changes in income and/or prices (consumption elasticity). The study focuses on two primary areas: Engel curves (income elasticity of consumption) and demand functions (price elasticity of demand). After outlining the evolution of consumption theory, the analysis points to more recent contributions. It also highlights recent advancements in addressing the issue of heterogeneity and aggregation. Empirical evidence shows that low-income households have a systematically higher propensity to consume than wealthier households, suggesting that redistributive policies or targeted transfers can significantly amplify aggregate consumption. Overall, this review provides a guide to the literature on consumption elasticity, bridging classical models with contemporary empirical insights to inform both theoretical modeling and empirical policy analysis. In Appendix A, a resume table of all empirical papers analysed is provided. The paper provides estimates of the elasticity of expenditure relative to income for Italy, using a quasi-panel dataset from the Italian Household Budget Survey (AD-HBS) between 2018 and 2022. Specifically, we estimate the Expenditure-Income Elasticity (EIE) using quantile regression methods at different points of the income distribution and with different characteristics of the population (working and marital status, type of income - labour, pensions and transfers -, demographic characteristics, geographical location etc.) and type of goods (durables, non-durables and services). We observe significant heterogeneity in the EIE distribution, which is strictly decreasing across quantiles and persistent across time. We observe extraordinary reductions in the waves of 2020, due to the pandemic outbreak, and in 2022, with the inflation spike and increased uncertainty related to the Russia–Ukraine war. The analysis highlights the importance of accounting for household heterogeneity when assessing the distributional effects of income changes. We discuss the relevance of the results for evaluating spending responses to fiscal interventions and redistributive scenarios. This paper provides a comprehensive evaluation of the multidimensional welfare effects of Italy’s Citizenship Income (Reddito di Cittadinanza, RdC), analysing its impact on consumption- and income-based poverty, household expenditure and labour market. Using rich microdata from the AD-HBS dataset, we apply a difference-in-differences approach combined with propensity score matching, and difference-in-discontinuity design as complement analysis. The results indicate that RdC significantly reduced both income-based and consumption-based poverty, lowering relative poverty by 5 percentage points and absolute poverty by 4 points among recipients. The programme also increased household consumption by approximately 4%, suggesting meaningful improvements in material living standards and providing evidence of its role as an automatic stabiliser during economic downturns. However, we also document a modest increase in unemployment and inactivity, along with a mild reduction in employment share, suggesting possible disincentives to formal labour participation.