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Behavioral Heterogeneity and the Income Effect

Author

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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.

Suggested Citation

  • Laurent Calvet & Etienne Comon, 2003. "Behavioral Heterogeneity and the Income Effect," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 653-669, August.
    • Handle: RePEc:tpr:restat:v:85:y:2003:i:3:p:653-669
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    Cited by:

    1. Khed, V. & K.b., U., 2018. "Application of AIDS model to analyse the farm household food demand elasticity: Evidence from panel data," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 275899, International Association of Agricultural Economists.
    2. Andreas Chai & Elena Stepanova & Alessio Moneta, 2022. "Quantifying Expenditure Hierarchies and the Expansion of Global Consumption Diversity," LEM Papers Series 2022/29, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    3. Arthur Lewbel & Krishna Pendakur, 2017. "Unobserved Preference Heterogeneity in Demand Using Generalized Random Coefficients," Journal of Political Economy, University of Chicago Press, vol. 125(4), pages 1100-1148.
    4. Jean-Michel Grandmont, 2017. "Behavioral Heterogeneity : Pareto Distributions of Homothetic Preference Scales and Aggregate Expenditures Income Elasticities," Working Papers 2017-11, Center for Research in Economics and Statistics.
    5. Andreas Chai & Alessio Moneta, 2013. "Back to Engel? Some Evidence for the Hierarchy of Needs," Economic Complexity and Evolution, in: Andreas Pyka & Esben Sloth Andersen (ed.), Long Term Economic Development, edition 127, pages 33-59, Springer.
    6. 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, vol. 28(2), pages 193-211, February.
    7. Mette Christensen, 2007. "Integrability of demand accounting for unobservable heterogeneity: a test on panel data," IFS Working Papers W07/14, Institute for Fiscal Studies.
    8. Alexander Osharin & Valery Verbus, 2018. "Heterogeneity of consumer preferences and trade patterns in a monopolistically competitive setting," Journal of Economics, Springer, vol. 125(3), pages 211-237, November.
    9. David Finck & Peter Tillmann, 2020. "Pandemic Shocks and Household Spending," MAGKS Papers on Economics 202036, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Sarantis Tsiaplias, 2021. "The Welfare Implications of Unobserved Heterogeneity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(4), pages 1029-1051, December.
    11. Isabel Proenca, 2005. "A Simple Deconvolving Kernel Density Estimator when Noise is Gaussian," Econometrics 0508006, University Library of Munich, Germany.
    12. John Quah, 2006. "Weak axiomatic demand theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(3), pages 677-699, November.
    13. D'Amato, Alessio & Mancinelli, Susanna & Zoli, Mariangela, 2016. "Complementarity vs substitutability in waste management behaviors," Ecological Economics, Elsevier, vol. 123(C), pages 84-94.
    14. Andreas Chai & Nicholas Rohde & Jacques Silber, 2015. "Measuring The Diversity Of Household Spending Patterns," Journal of Economic Surveys, Wiley Blackwell, vol. 29(3), pages 423-440, July.
    15. Koulovatianos, Christos & Schröder, Carsten & Schmidt, Ulrich, 2019. "Do demographics prevent consumption aggregates from reflecting micro-level preferences?," European Economic Review, Elsevier, vol. 111(C), pages 166-190.
    16. 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.
    17. Chai, Andreas & Stepanova, Elena & Moneta, Alessio, 2023. "Quantifying expenditure hierarchies and the expansion of global consumption diversity," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 860-886.
    18. Ludo Peeters, 2011. "Controlling For Heterogeneity And Asymmetry In Cross-Section Gravity Models Of Aggregate Migration: Evidence From Mexico," ERSA conference papers ersa10p329, European Regional Science Association.
    19. David Finck & Peter Tillmann, 2022. "Pandemic Shocks and Household Spending," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 273-299, April.
    20. Takashi Unayama, 2006. "The Engel curve for alcohol and the rank of demand systems," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 1019-1038.
    21. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2008. "Demographic versus expenditure flexibility in Engel curves," Empirical Economics, Springer, vol. 34(2), pages 257-271, March.
    22. Stephan B. Bruns & Alessio Moneta, 2017. "Intertemporal propensity to consume," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 295-314, April.
    23. Pablo del Río & Desiderio Romero & Marta Jorge & Mercedes Burguillo, 2012. "Territorial differences for transport fuel demand in Spain: an econometric study," Chapters, in: Larry Kreiser & Ana Yábar Sterling & Pedro Herrera & Janet E. Milne & Hope Ashiabor (ed.), Green Taxation and Environmental Sustainability, chapter 4, pages 56-68, Edward Elgar Publishing.
    24. 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, vol. 38(8), pages 3898-3909, August.

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