Integration of Household Heterogeneity in Input-Output Modelling: A Comprehensive Literature Review

Several studies highlight that standard Input-Output (IO) models do not accurately represent household consumption behaviour, namely due to the assumption of a representative household, which overlooks heterogeneity. This limitation affects, among other things, the estimation of induced effects, which are highly significant in economic impact analysis using IO methodology. This paper explores the importance of incorporating household heterogeneity into IO models and reviews methods for introducing such disaggregation. Demographic-Economic Extended IO Models are a common approach, with the Miyazawa and Batey–Madden models being particularly prominent. Alongside an analysis of these seminal models, the paper identifies recent developments and compares extended IO models with related frameworks that also incorporate household heterogeneity. It concludes that extended models not only enhance the realism of multipliers but also allow for the derivation of additional multipliers that reflect interactions between demographic and economic variables, making IO methodology a powerful analytical tool in suitable contexts.