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Heterogeneity in Consumer Demands and the Income Effect: Evidence from Panel Data

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  • Mette Christensen

Abstract

This paper uses unique Spanish panel data on household expenditures to test whether unobservable heterogeneity in household demands (taste, etc.) is correlated with total expenditures (income). The main finding is that tastes are indeed correlated with income for about half of the goods considered, implying that cross-sectional estimates of income elasticities for these goods are biased. The goods are the following: food eaten outside home, alcohol and tobacco, transportation, and energy. The elasticity of alcohol and tobacco is more than halved when taking unobserved heterogeneity into account. For transportation, the bias is sufficiently large to misclassify the good as a luxury.

Suggested Citation

  • Mette Christensen, 2014. "Heterogeneity in Consumer Demands and the Income Effect: Evidence from Panel Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(2), pages 335-355, April.
    • Handle: RePEc:bla:scandj:v:116:y:2014:i:2:p:335-355
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    File URL: http://hdl.handle.net/10.1111/sjoe.12049
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    Cited by:

    1. François Gardes, 2021. "Endogenous Prices in a Riemannian Geometry Framework," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03325414, HAL.
    2. 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.
    3. Hjertstrand, Per, 2020. "Income Elasticities Without Parameters," Working Paper Series 1324, Research Institute of Industrial Economics.
    4. François Gardes, 2021. "Endogenous Prices in a Riemannian Geometry Framework," Post-Print halshs-03325414, HAL.
    5. 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.
    6. François Gardes, 2021. "Endogenous Prices in a Riemannian Geometry Framework," Documents de travail du Centre d'Economie de la Sorbonne 21026, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    7. Stefan Hoderlein & Jörg Stoye, 2015. "Testing stochastic rationality and predicting stochastic demand: the case of two goods," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 313-328, October.

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