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Behavioral Heterogeneity and The Income Effect

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  • Laurent E. Calvet
  • Etienne Comon

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 aacross income strata can arise from two economic factors: the individual income effect, and taste differences between poor and rich households. Consumer expenditure surveys that report repeated cross-sections do not permit the direct measurement of these two effects, and the paper solves this difficulty by developing a new microeconometric framework. We model consumer demand by a class of Nearly Ideal Demand Systems parameterized by a unique taste parameter. Linear heterogeneity allows GMM estimation of the structural coefficients on an aggregate time series, and the joint density of spending and tastes is recovered from cross-sections by a nonparametric procedure involving a deconvolution. We develop an asymptotic theory and demonstrate the accuracy of the algoriithm by Monte Carlo and bootstsrap simulations. The model is estimated on four size groups using the British Family Expenditure Survey (1968-98). We report a strong correlation between income and tastes, which explains most of the observed varriation of budget shares with income. Unlike some earlier models, this new approach is consistent with both the yearly cross-sections of individual choices and the dynamics of aggregate shares.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1892.

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Date of creation: 2000
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Handle: RePEc:fth:harver:1892

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Web page: http://www.economics.harvard.edu/journals/hier
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Cited by:
  1. Mette Christensen, 2007. "Integrability of demand accounting for unobservable heterogeneity: a test on panel data," IFS Working Papers W07/14, Institute for Fiscal Studies.
  2. 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.
  3. 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.
  4. 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.
  5. Andreas Chai & Alessio Moneta, 2011. "Back to Engel? Some evidence for the hierarchy of needs," Papers on Economics and Evolution 2011-13, Max Planck Institute of Economics, Evolutionary Economics Group.
  6. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2008. "Demographic versus expenditure flexibility in Engel curves," Empirical Economics, Springer, vol. 34(2), pages 257-271, March.
  7. John Quah, 2006. "Weak axiomatic demand theory," Economic Theory, Springer, vol. 29(3), pages 677-699, November.
  8. Isabel Proenca, 2005. "A Simple Deconvolving Kernel Density Estimator when Noise is Gaussian," Econometrics 0508006, EconWPA.
  9. 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.
  10. 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.

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