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Estimating Latent Total Consumption in a Household

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Abstract

This article presents a new way of estimating latent total consumption in a household that may improve the accuracy of studies into permanent income and consumption inequality. While the frequently used total purchase expenditure in a household is an unbiased estimator of latent total household consumption, it is inoptimal since total purchase expenditure is an un-weighted sum of expenditures that contain measurement errors. We derive a competing estimator, unbiased and variance minimizing, based on a latent variable model. From estimates of error term variance among consumption indicators, we give accurate indicators more weight, and align weights to minimize variance. An advantage of the suggested estimator is that it allows both expenditure and non-expenditure indicators of latent total consumption. We demonstrate empirically how the minimum-variance estimator reduces variance, and find that on Norwegian expenditure data from 1993 the reduction is 44 per cent.

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  • Erling Røed Larsen, 2002. "Estimating Latent Total Consumption in a Household," Discussion Papers 324, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:324
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    3. Urban J. Jermann & Marianne Baxter, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," American Economic Review, American Economic Association, vol. 89(4), pages 902-920, September.
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    6. Lewbel, Arthur, 1996. "Demand Estimation with Expenditure Measurement Errors on the Left and Right Hand Side," The Review of Economics and Statistics, MIT Press, vol. 78(4), pages 718-725, November.
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    9. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
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    13. Saunders, Christopher, 1980. "Measures of Total Household Consumption," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 26(4), pages 351-366, December.
    14. Jørgen Aasness & Erling Røed Larsen, 2002. "Distributional and Environmental Effects of Taxes on Transportation," Discussion Papers 321, Statistics Norway, Research Department.
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    Cited by:

    1. Erling Røed Larsen, 2005. "Distributional Effects of Environmental Taxes on Transportation. Evidence from Engel Curves in the United States," Discussion Papers 428, Statistics Norway, Research Department.
    2. Erling Røed Larsen, 2002. "Consumption Inequality in Norway in the 80s and 90s," Discussion Papers 325, Statistics Norway, Research Department.

    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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