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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.

Suggested Citation

  • Laurent E. Calvet & Etienne Comon, 2000. "Behavioral Heterogeneity and The Income Effect," Harvard Institute of Economic Research Working Papers 1892, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1892
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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. 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.
    3. 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.
    4. D'Amato, Alessio & Mancinelli, Susanna & Zoli, Mariangela, 2016. "Complementarity vs substitutability in waste management behaviors," Ecological Economics, Elsevier, vol. 123(C), pages 84-94.
    5. repec:ucp:jpolec:doi:10.1086/692808 is not listed on IDEAS
    6. 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.
    7. Jean-Michel Grandmont, 2017. "Behavioral Heterogeneity: Pareto Distributions of Homothetic Preference Scales and Aggregate Expenditures Income Elasticities," Discussion Paper Series DP2017-31, Research Institute for Economics & Business Administration, Kobe University.
    8. 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.
    9. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2008. "Demographic versus expenditure flexibility in Engel curves," Empirical Economics, Springer, vol. 34(2), pages 257-271, March.
    10. 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.
    11. Stephan B. Bruns & Alessio Moneta, 2017. "Intertemporal propensity to consume," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 295-314, April.
    12. Andreas Chai & Alessio Moneta, 2012. "Back to Engel? Some evidence for the hierarchy of needs," Journal of Evolutionary Economics, Springer, vol. 22(4), pages 649-676, September.
    13. Pablo del Río & Desiderio Romero & Marta Jorge & Mercedes Burguillo, 2012. "Territorial differences for transport fuel demand in Spain: an econometric study," Chapters,in: Green Taxation and Environmental Sustainability, chapter 4, pages 56-68 Edward Elgar Publishing.
    14. 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.
    15. 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.
    16. 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.
    17. Isabel Proenca, 2005. "A Simple Deconvolving Kernel Density Estimator when Noise is Gaussian," Econometrics 0508006, EconWPA.

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