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Smooth it Like the 'Joneses'? Estimating Peer-Group Effects in Intertemporal Consumption Choice

  • Jürgen Maurer
  • André Meier

Recent theoretical contributions have suggested peer-group effects as a potential explanation for several puzzles in macroeconomics but their empirical relevance for intertemporal consumption choice is an open question. We derive an extension of the standard life-cycle model that allows for consumption externalities. In this framework, we propose a social multiplier approach to distinguish true externalities from merely correlated effects. Estimating our model using US panel data, we find strong predictable co-movement of household consumption within peer groups. Although much of this co-movement reflects correlated effects only, there is statistically significant evidence for moderate consumption externalities across several plausible peer-group specifications. Copyright � 2008 The Author(s).

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 527 (03)
Pages: 454-476

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Handle: RePEc:ecj:econjl:v:118:y:2008:i:527:p:454-476
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