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The lambda model and "rule of thumb" consumers: An estimation problem in existing studies

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  • Andersson, Fredrik W.
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    Abstract

    Campbell and Mankiw's (1990) lambda model has frequently been used to estimate the fraction of rule of thumb consumers (i.e., consumers who do not smooth their consumption). However, the present note shows theoretically, as well as with a numerical illustration, that existing empirical applications of the lambda model imply a systematic underestimation of this fraction. The reason is that per capita values instead of aggregate values (which the model is designed for) are used.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 40 (2011)
    Issue (Month): 4 (August)
    Pages: 381-384

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    Handle: RePEc:eee:soceco:v:40:y:2011:i:4:p:381-384

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    Web page: http://www.elsevier.com/locate/inca/620175

    Related research

    Keywords: Permanent income consumers Current income consumers Rule of thumb consumers The lambda model Aggregation bias;

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    1. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
    2. Johansson-Stenman, Olof, 2010. "Risk aversion and expected utility of consumption over time," Games and Economic Behavior, Elsevier, vol. 68(1), pages 208-219, January.
    3. Yih-Luan Chyi & Chao-Hsi Huang, 1997. "An empirical study of the 'rule of thumb' consumption model in five East Asian countries," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1271-1282.
    4. Agell, Jonas & Berg, Lennart, 1996. " Does Financial Deregulation Cause a Consumption Boom?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 579-601, December.
    5. John H. Cochrane, 1988. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," NBER Working Papers 2730, National Bureau of Economic Research, Inc.
    6. John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
    7. Shea, John, 1995. "Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 798-805, August.
    8. Nicholas Barberis & Ming Huang & Richard H. Thaler, 2006. "Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing," American Economic Review, American Economic Association, vol. 96(4), pages 1069-1090, September.
    9. James C. Cox & Vjollca Sadiraj, 2008. "Risky Decisions in the Large and in the Small: Theory and Experiment," Experimental Economics Center Working Paper Series 2008-01, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    10. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
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