The saturation of household spending diversity and emergent properties of representative households

This paper studies the diversity of household consumption spending, i.e. how widely households distribute their spending across different types of goods. Using detailed expenditure data from the UK (1990 - 2015), we show that the diversity of household spending rises in income up to a certain level and then starts to decline as richer households increasingly concentrate their spending on specific expenditure categories. As these specific expenditure categories differ across households, spending diversity on the aggregate level can keep rising in income while spending diversity on the household level falls. This implies that the process of aggregation, which is often used to infer the behavior of representative (average) households, generates emergent properties, i.e. trends that only exist on the aggregate level but not on the level of individual households. We build a model with heterogeneous non-homothetic preferences that can explain these observed patterns. Our model shows that ignoring preference heterogeneity and assuming representative households leads to a (potentially very large) underestimation of the value of product variety.