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Income and Consumption: A Micro Semistructural Analysis with Pervasive Heterogeneity

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  • Sule Alan
  • Martin Browning
  • Mette Ejrnæs

Abstract

We develop a model of consumption and income that allows for pervasive heterogeneity in the parameters of both processes. Introducing codependence between household income parameters and preference parameters, we also allow for heterogeneity in the impact of income shocks on consumption. We estimate the parameters of the model using a sample from the Panel Study of Income Dynamics, covering the period 1968–2009. We find considerable codependent heterogeneity in the parameters governing income and consumption processes. Our results suggest a great deal of heterogeneity in the reaction of consumption to income shocks, highlighting the heterogeneity in the self-insurance available to households.

Suggested Citation

  • Sule Alan & Martin Browning & Mette Ejrnæs, 2018. "Income and Consumption: A Micro Semistructural Analysis with Pervasive Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 126(5), pages 1827-1864.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/699186
    DOI: 10.1086/699186
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    Cited by:

    1. Le blanc, Julia & Slacalek, Jiri & White, Matthew N., 2025. "Housing Wealth Across Countries: The Role of Expectations, Institutions and Preferences," JRC Working Papers in Economics and Finance 2025-01, Joint Research Centre, European Commission.
    2. Michiru Kaneda & So Kubota & Satoshi Tanaka, 2021. "Who spent their COVID-19 stimulus payment? Evidence from personal finance software in Japan," The Japanese Economic Review, Springer, vol. 72(3), pages 409-437, July.
    3. Robin Jessen & Johannes König, 2023. "Hours risk and wage risk: repercussions over the life cycle," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(4), pages 956-996, October.
    4. Holmberg, Johan, 2021. "Earnings and Labor Market Dynamics: Indirect Inference Based on Swedish Register Data," Umeå Economic Studies 984, Umeå University, Department of Economics.
    5. Nianzhai Ma & Weizeng Sun & Zhen Wang, 2022. "Host Identity and Consumption Behavior: Evidence from Rural–Urban Migrants in China," Sustainability, MDPI, vol. 14(19), pages 1-25, September.
    6. M. Hashem Pesaran & Liying Yang, 2024. "Heterogeneous autoregressions in short T panel data models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(7), pages 1359-1378, November.
    7. Crawley, Edmund & Theloudis, Alexandros, 2024. "Income Shocks and their Transmission into Consumption," Discussion Paper 2024-012, Tilburg University, Center for Economic Research.
    8. Pavel K. Koval & Andrey V. Polbin, 2023. "Estimation of Heterogenous Consumption and Income Parameters," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 6, pages 76-92, December.
    9. Kallestrup-Lamb, Malene & Marin, Alexander O.K. & Menon, Seetha & Søgaard, Jes, 2024. "Aging populations and expenditures on health," The Journal of the Economics of Ageing, Elsevier, vol. 29(C).
    10. Belloc, Ignacio & Molina, José Alberto & Velilla, Jorge, 2025. "Inheritance Shocks and Expenditure Patterns: A Dynamic Collective Approach," IZA Discussion Papers 18243, IZA Network @ LISER.
    11. Theloudis, Alexandros, 2021. "Consumption inequality across heterogeneous families," European Economic Review, Elsevier, vol. 136(C).
    12. Li, Jialong & Li, Jiao, 2025. "Does climate risk impact household consumption? Evidence from China," Economic Modelling, Elsevier, vol. 152(C).
    13. Johan Holmberg, 2024. "Earnings, labor market dynamics, and inequality in Sweden," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(3), pages 561-599, July.
    14. Antonio Cutanda & José M. Labeaga & Juan A. Sanchis-Llopis, 2020. "Aggregation biases in empirical Euler consumption equations: evidence from Spanish data," Empirical Economics, Springer, vol. 58(3), pages 957-977, March.
    15. Rowena Crawford & Cormac O'Dea, 2020. "Household portfolios and financial preparedness for retirement," Quantitative Economics, Econometric Society, vol. 11(2), pages 637-670, May.
    16. Arellano, Manuel & Blundell, Richard & Bonhomme, Stéphane & Light, Jack, 2024. "Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence," Journal of Econometrics, Elsevier, vol. 240(2).
    17. Kankwamba, Henry & Kornher, Lukas, 2023. "Household shocks, infrastructural investments, food and nutrition security linkages in Malawi," 2023 Seventh AAAE/60th AEASA Conference, September 18-21, 2023, Durban, South Africa 365882, African Association of Agricultural Economists (AAAE).
    18. Thomas Epper & Ernst Fehr & Helga Fehr-Duda & Claus Thustrup Kreiner & David Dreyer Lassen & Søren Leth-Petersen & Gregers Nytoft Rasmussen, 2020. "Time Discounting and Wealth Inequality," American Economic Review, American Economic Association, vol. 110(4), pages 1177-1205, April.
    19. Sager, Lutz, 2019. "Income inequality and carbon consumption: Evidence from Environmental Engel curves," Energy Economics, Elsevier, vol. 84(S1).
    20. Congxian He & Ruiqing Shi & Huwei Wen, 2024. "The Peer Effects of Residents’ Carbon Emission Behavior: An Empirical Analysis in China," Sustainability, MDPI, vol. 16(21), pages 1-21, October.
    21. Jessen, Robin & König, Johannes, 2018. "Hours risk, wage risk, and life-cycle labor supply," Ruhr Economic Papers 771, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    22. Gobillon, Laurent & Magnac, Thierry & Roux, Sébastien, 2022. "Lifecycle Wages and Human Capital Investments: Selection and Missing Data," TSE Working Papers 22-1299, Toulouse School of Economics (TSE).
    23. Varga, János Zoltán & Soós, Gábor Dániel, 2025. "A magyar fogyasztói és üzleti bizalom makrogazdasági vonatkozásai [Macroeconomic implications of Hungarian consumer and business confidence]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1179-1206.

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