We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.

We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.

We analyze entry, pricing, and product design in a model with differentiated products. Market equilibrium can be “separating,” with multiple sellers and a sorting of heterogeneous consumers across goods, or “exclusionary,” with one seller serving all customer types. Entry into an initially monopolized market can occur because of cost reductions or product improvements, but entry need not lower the incumbent’s price, improve efficiency, or raise consumer welfare. Postentry design incentives favor a softening of price competition and stronger market segmentation, whereas exclusionary design changes typically raise consumer welfare. Potential, as distinct from actual, entry always benefits consumers.