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Behavioral Heterogeneity and the Income Effect

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  • Laurent Calvet

    (Harvard University)

  • Etienne Comon

    (Harvard University)

Abstract

Inspired by the recent literature on aggregation theory, this paper introduces HITS, a semiparametric model of consumer demand that allows for diversity in tastes. The strong variation of budget shares observed across income groups has two possible origins: the individual income effect, and taste differences between poor and rich households. Consumer surveys reporting repeated cross sections do not permit the direct measurement of these two effects. In HITS, linear heterogeneity allows the GMM estimation of structural coefficients on an aggregate series. The joint density of spending and tastes is then recovered from cross sections by a nonparametric procedure involving a deconvolution. We estimate the model on British data (1968-1998) and report that taste heterogeneity explains a large fraction of the variation of budget shares with income. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 85 (2003)
Issue (Month): 3 (August)
Pages: 653-669

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Handle: RePEc:tpr:restat:v:85:y:2003:i:3:p:653-669

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Cited by:
  1. Romero-Jordán, Desiderio & del Río, Pablo & Jorge-García, Marta & Burguillo, Mercedes, 2010. "Price and income elasticities of demand for passenger transport fuels in Spain. Implications for public policies," Energy Policy, Elsevier, Elsevier, vol. 38(8), pages 3898-3909, August.
  2. Mette Christensen, 2007. "Integrability of demand accounting for unobservable heterogeneity: a test on panel data," IFS Working Papers, Institute for Fiscal Studies W07/14, Institute for Fiscal Studies.
  3. John Quah, 2000. "Weak Axiomatic Demand Theory," Economics Series Working Papers, University of Oxford, Department of Economics 2000-W12, University of Oxford, Department of Economics.
  4. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2008. "Demographic versus expenditure flexibility in Engel curves," Empirical Economics, Springer, Springer, vol. 34(2), pages 257-271, March.
  5. Andreas Chai & Alessio Moneta, 2011. "Back to Engel? Some evidence for the hierarchy of needs," Papers on Economics and Evolution, Philipps University Marburg, Department of Geography 2011-13, Philipps University Marburg, Department of Geography.
  6. Isabel Proenca, 2005. "A Simple Deconvolving Kernel Density Estimator when Noise is Gaussian," Econometrics, EconWPA 0508006, EconWPA.
  7. Ludo Peeters, 2011. "Controlling For Heterogeneity And Asymmetry In Cross-Section Gravity Models Of Aggregate Migration: Evidence From Mexico," ERSA conference papers, European Regional Science Association ersa10p329, European Regional Science Association.
  8. Grinstein-Weiss, Michal & Wagner, Kristen & Ssewamala, Fred M., 2006. "Saving and asset accumulation among low-income families with children in IDAs," Children and Youth Services Review, Elsevier, Elsevier, vol. 28(2), pages 193-211, February.
  9. Takashi Unayama, 2006. "The Engel curve for alcohol and the rank of demand systems," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(7), pages 1019-1038.
  10. Murata, Yasusada, 2007. "Taste heterogeneity and the scale of production: Fragmentation, unification, and segmentation," Journal of Urban Economics, Elsevier, vol. 62(1), pages 135-160, July.

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