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Do the "Joneses" really matter? Peer-group versus correlated effects in intertemporal consumption choice

Author

Listed:
  • Jürgen Maurer

    (Institute for Fiscal Studies)

  • André Meier

    (Institute for Fiscal Studies)

Abstract

Recent theoretical contributions have suggested consumption externalities, or peergroup effects, as a potential explanation for some of the puzzles in macroeconomics and finance. However, the empirical relevance of peer effects for intertemporal consumption choice is a completely open question. To shed some light on the issue, we derive an extension of the standard life-cycle model that allows for consumption externalities. The analysis is complicated by the challenge of disentangling actual peer effects from merely correlated effects operating through common features or shocks within peer groups. We show how to conduct reliable inference under these circumstances based on within-group equilibrium conditions that give rise to a social multiplier. This approach can be understood as an adaptation of Manski's "reflection problem framework" to the case of dynamic models with endogenous regressors. We estimate our model using US panel data from the PSID. While there is strong predictable consumption co-movement within peer groups, the evidence for true consumption externalities vanishes once correlated effects are adequately accounted for.

Suggested Citation

  • Jürgen Maurer & André Meier, 2005. "Do the "Joneses" really matter? Peer-group versus correlated effects in intertemporal consumption choice," IFS Working Papers W05/15, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:05/15
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    File URL: http://www.ifs.org.uk/wps/wp0515.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jürgen Maurer & André Meier, 2008. "Smooth it Like the “Joneses?†Estimating Peer-Group Effects in Intertemporal Consumption Choice," MEA discussion paper series 08167, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

    More about this item

    Keywords

    Consumption; Life-Cycle Model; Peer Effects; Reflection Problem;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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