Showing papers on "Consumption (economics) published in 1989"

Consumption and Liquidity Constraints: An Empirical Investigation

Abstract: Several recent studies have suggested that empirical rejections of the permanent income/life cycle model might be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population.

Saving and Liquidity Constraints

Abstract: This paper is concerned with the theory of saving when consumers are not permitted to borrow, and with the ability of such a theory to account for some of the stylized facts of saving behavior. When consumers are relatively impatient, and when labor income is independently and identically distributed over time, assets act like a buffer stock, protecting consumption against bad draws of income. The precautionary demand for saving interacts with the borrowing constraints to provide a motive for holding assets. If the income process is positively autocorrelated, but stationary, assets are still used to buffer consumption, but do so less effectively, and at a greater cost in terms of foregone consumption. In the limit, when labor income is a random walk, it is optimal for impatient liquidity constrained consumers simply to consume their incomes. As a consequence, a liquidity constrained representative agent cannot generate aggregate U.S. saving behavior if that agent receives aggregate labor income. Either there is no saving, when income is a random walk, or saving is contracyclical over the business cycle, when income changes are positively autocorrelated. However, in reality, microeconomic income processes do not resemble their average, and it is possible to construct a model of microeconomic saving under liquidity constraints which, at the aggregate level, reproduces many of the stylized facts in the actual data. While it is clear that many households are not liquidity constrained, and do not behave as described here, the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life-cycle models.

Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence

Abstract: This paper proposes that the time-series data on consumption, income, and interest rates are best viewed as generated not by a single representative consumer but by two groups of consumers. Half the consumers are forward-looking and consume their permanent income, but are extremely reluctant to substitute consumption temporarily. Half the consumers follow the "rule of thumb" of consuming their current income. The paper documents three empirical regularities that, it argues, are best explained by this medal. First, expected changes in income are associated with expected changes in consumption. Second, expected real interest rates are not associated with expected changes in consumption. Third, periods in which consumption is high relative to income are typically followed by high growth in income. The paper concludes by briefly discussing the implications of these findings for economic policy and economic research.

Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence

Abstract: This paper proposes that the time-series data on consumption, income, and interest rates are best viewed as generated not by a single representative consumer but by two groups of consumers. Half the consumers are forward-looking and consume their permanent income, but are extremely reluctant to substitute consumption intertemporally. Half the consumers follow the "rule of thumb" of consuming their current income. The paper documents three empirical regularities that, it argues, are best explained by this model. First, expected changes in income are associated with expected changes in consumption. Second, expected real interest rates are not associated with expected changes in consumption. Third, periods in which consumption is high relative to income are typically followed by high growth in income. The paper concludes by briefly discussing the implications of these findings for economic policy and economic research.

Consumption Smoothing, Migration, and Marriage: Evidence from Rural India

Abstract: A significant proportion of migration in low-income countries, particularly in rural areas, is composed of moves by women for the purpose of marriage. We seek to explain these mobility patterns by examining marital arrangements among Indian households. In particular, we hypothesize that the marriage of daughters to locationally distant, dispersed yet kinship-related households is a manifestation of implicit interhousehold contractual arrangements aimed at mitigating income risks and facilitating consumption smoothing in an environment characterized by information costs and spatially covariant risks. Analysis of longitudinal South Indian village data lends support to the hypothesis. Marriage cum migration contributes significantly to a reduction in the variability of household food consumption. Farm households afflicted with more variable profits tend to engage in longer-distance marriage cum migration. The hypothesized and observed marriage cum migration patterns are in dissonance with standard models of marriage or migration that are concerned primarily with search costs and static income gains.

Culture and Consumption: New Approaches to the Symbolic Character of Consumer Goods and Activities

Abstract: Acknowledgments Introduction Part I. History One. The Making of Modern Consumption Two. "Ever Dearer in Our Thoughts": Patina and the Representation of Status before and after the Eighteenth Century Three. Lois Roget: Curatorial Consumer in a Modern World Part II. Theory Four. Clothing as Language: An Object Lesson in the Study of the Expressive Properties of Material Culture Five. Meaning Manufacture and Movement in the World of Goods Part III. Practice Six. Consumer Goods, Gender Construction, and a Rehabilitated Trickle-down Theory Seven. The Evocative Power of Things: Consumer Goods and the Preservation of Hopes and Ideals Eight. Diderot Unitites and the Diderot Effect: Neglected Cultural Aspects of Consumption Nine. Consumption, Change, and Continuity Notes References Index

Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence

Abstract: No one has derived closed-form solutions for consumption with stochastic labor income and constant relative risk aversion utility. A numerical technique is used here to give an accurate approximation to the solution. The resulting consumption function is often dramatically different than the certainty equivalence solution typically used, in which consumption is proportional to the sum of financial wealth and the present value of expected future income. The results help explain three important empirical consumption puzzles: excess sensitivity of consumption to transitory income, high growth of consumption in the presence of a low risk-free interest rate, and underspending of the elderly.

Gasoline Consumption and Cities: A Comparison of U.S. Cities with a Global Survey

Abstract: Gasoline consumption per capita in ten large United States cities varies by up to 40 percent, primarily because of land use and transportation planning factors, rather than price or income variations. The same patterns, though more extreme, appear in a global sample of 32 cities. Here, average gasoline consumption in U.S. cities was nearly twice as high as in Australian cities, four times higher than in European cities and ten times higher than in Asian cities. Allowing for variations in gasoline price, income, and vehicle efficiency explains only half of these differences. We suggest physical planning policies, particularly reurbanization and a reorientation of transportation priorities as a means of reducing gasoline consumption and automobile dependence.

The Ricardian Approach to Budget Deficits

Abstract: Persistent budget deficits have increased economists' interest in theories and evidence about fiscal policy. This paper develops the Ricardian approach and contrasts it with standard models. The discussion considers from major theoretical objections to Ricardian equivalence-finite lifetimes, imperfect capital markets, uncertainty about future taxes and incomes, and the distorting effects of taxation Then the paper considers empirical evidence on interest rates, consumption and saving, and current-account deficits. The conclusion is that the Ricardian approach is a useful first-order approximation, and that this approach will probably become the benchwork model for assessing fiscal policy.

Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data

Abstract: What is the basic economic decision-making unit? Is it the household or the extended family? This question is fundamental to economic analysis and policy design. The answer given by the Life Cycle and Keynesian models is that the economic unit is the household. According to these models, members of particular households act selfishly and do not fully share resources with extended family members in other households. Hence, altering the distribution of resources across households within the extended family will alter the consumption and labor supply of those households who acquire or lose resources. In contrast to the Life Cycle and Keynesian models, the altruism model implies that the extended family is the basic economic decision-making unit. According to this model the extended family is linked through altruism and, as a result, acts as if it fully shares resources. In the altruism model nondistortionary changes in the distribution of resources across households within the extended family will have no effect on the consumption or labor supply of any of its members. Despite its importance, the boundaries of economic decision-making units have not, to our knowledge, been examined directly with micro data. Stated differently, the altruism model has not been tested against the Life Cycle and Keynesian alternatives with such data. This paper uses matched data on parents and their adult children, contained in the Panel Study of Income Dynamics, to perform such a test. In essence our test asks whether the distribution of consumption and labor supply across households within the extended family depends on the distribution of resources across households within the extended family. Our findings provide quite strong evidence against the altruism model. The distribution of resources across households within the extended family is a highly significant (statistically and economically) determinant of the distribution of onsumption within the extended family. This finding holds for the entire sample as well as the subsample consisting of rich parents and poor children. In addition to showing that the distribution of extended family resources matters for extended family consumption, we test the life cycle model by asking whether only own resources matter, i.e., whether the resources of extended family members have no affect on a household's consumption. Our results indicate that extended family member resources have, at most, a modest effect on household consumption after one has controlled for the fact that extended family resources help predict a household's own permanent income.

Why is Consumption So Smooth

Abstract: For thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income. This paper considers the evidence for the contrary position, that permanent income is in fact less smooth than measured income, so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory. The paper argues that in postwar U.S. quarterly data, consumption is smooth because it responds with a lag to changes in income.

Time Preference, the Consumption Function, and Optimum Asset Holdings

Abstract: The problem of demand for money and other assets has been recently studied by Douglas (1966) and Sidrauski (1965) within the framework of a rational individual faced with the choice of a consumption schedule which is optimal with respect to the individual’s time preference structure. In both papers, the intertemporal utility function upon which the consumer’s choice is based is represented by a discounted integral of the stream of instantaneous utility levels, where future utilities are discounted by a rate which is kept constant independently of time profile of the utility stream associated with each consumption schedule. Thus, if a consumer is permitted to hold his assets either in the form of real cash balances or in the form of perpetuities yielding a constant rate of interest and if his instantaneous utility function is linear and homogeneous, he will either postpone his consumption until the very last moment or will consume as much as possible, according to whether the subject rate of discount is lower than the rate of interest. The only case in which the individual would desire to possess two types of assets simultaneously is one where his subject rate of discount is precisely equal to the rate of interest. Douglas has avoided this difficulty by having the level of bond holdings as one of the components for instantaneous utility level, while Sidrauski has introduced real capital as an alternative asset for which the rate of return varies with the amount held. In this paper, we shall instead start with an analysis of an individual’s time preference structure, to derive a certain specific formulation regarding the rate by which he discounts future levels. We shall then proceed to examine the behavior of an individual consumer who decides the allocation of his income between consumption and savings and the choice of portfolio balances in such manner that the resulting consumption stream is most preferred in terms of his time 486preference structure. The analysis will be first carried out for the simple case in which the individual is permitted to hold his assets only in the form of bonds for which the expected rate of interest is constant, and then for a more general case in which he may hold his assets in the form of money and bonds and other types for which the rates of return may vary.

A double‐hurdle model of cigarette consumption

Abstract: This paper shows the importance of the double-hurdle approach for modelling individuals' cigarette consumption, using data from the UK General Household Survey, and argues that participation and consumption should be treated as separate individual choices. The likelihood function for the full double-hurdle is derived, and it is shown how restrictions on the stochastic specification of the model and auxillary information, which identifies ex-smokers, allow it to be decomposed. The empirical results highlight the value of the sample separation information and the need to model starting and quitting as separate decisions.

Rice Prices and Income Distribution in Thailand: A Non-Parametric Analysis

Abstract: Rice is a staple crop in Thailand, significantly entering both household production and consumption. This paper examines the effect of rice prices on the distribution of real income across households, taking into account household characteristics and geographical location. The data set is a large-scale survey of 11,893 households. Simple nonparametric techniques for regression and density estimation are used. These methods depend on few assumptions and generate flexible graphical results that are directly informative about the problem at hand. The main results are that higher rice prices should benefit all rural households, but the largest benefits accrue to rural households in the middle of the income distribution. Copyright 1989 by Royal Economic Society.

A Cross-Country Study of Growth, Saving, and Government

Abstract: Models of endogenous economic growth can generate long-term growth without relying on exogenous changes in technology or population. A general feature of these models is the presence of constant or increasing returns in the factors that can be accumulated. I use some models of this type to study the determination of per capita growth, investment in physical and human capital, and population growth. The determinants of these variables involve aspects of government policy - including public infrastructure services, maintenance of property rights, government consumption, and taxation - and the initial level of per capita income. I examine the predicted relationships by using a cross-country sample that expands on the Summers-Heston set of about 120 countries. Aside from their data on levels of per capita GDP and the breakdown of GDP into components, I have added information about the composition of government expenditures, proxies for economic freedom and property rights, measures of political stability, and so on. This expansion in variables reduced the number of countries to 72. The findings verify some of the predictions about the determination of growth and investment/saving rates. For example, government consumption and investment spending, and proxies for economic freedom show up as suggested by the models. Also, the interplay among population growth, investment in human capital (school enrollment), and the initial level of per capita income confirm theoretical predictions about the tradeoff between the quantity and quality of children. I anticipate that additional results will emerge from my ongoing research in this area.

Rational Turnout: The Neglected Role of Groups

Abstract: Rational choice theories have difficulty accounting for individual participation in collective action. Voting is among the acts hardest to explain; consumption benefits have been proposed to account for nonzero turnout. The model presented here establishes a political investment basis for these benefits. I argue that voters often act not in isolation but as part of groups with shared interests. While individuals still vote because of consumption benefits arising from the act of voting, some of these consumption benefits are provided by group leaders out of collective benefits received by the group in return for its votes. The collective benefit comes from a candidate adopting policy positions closer to those of the group. In passing, I show that the widespread availability of public opinion polling increases the candidate's incentive to shift position. Finally, some data from recent off-year elections are shown to be consistent with the model.

Consumption Growth Parallels Income Growth: Some New Evidence

Abstract: This paper argues that the versions of both permanent income and life-cycle theories which have recently become fashionable are inconsistent with the grossest features of cross-country and cross-section data on consumption and income. There is clear evidence that consumption and income growth are much more closely linked than would be predicted by these theories. it appears that consumption smoothing takes place over periods of several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income component is not to be regarded as expected lifetime earnings... It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness." They call into question the usefulness of standard representative Consumer approaches to the analysis of saving behavior. And they call for increased emphasis on liquidity constraints and short run precautionary saving as determinants of consumption behavior.

Saving and Liquidity Constraints

Abstract: This paper is concerned with the theory of saving when consumers are not permitted to borrow, and with the ability of such a theory to account for some of the stylized facts of saving behavior. When consumers are relatively impatient, and when labor income is independently and identically distributed over time, assets act like a buffer stock, protecting consumption against bad draws of income. The precautionary demand for saving interacts with the borrowing constraints to provide a motive for holding assets. If the income process is positively autocorrelated, but stationary, assets are still used to buffer consumption, but do so less effectively, and at a greater cost in terms of foregone consumption. In the limit, when labor income is a random walk, it is optimal for impatient liquidity constrained consumers simply to consume their incomes. As a consequence, a liquidity constrained representative agent cannot generate aggregate U.S. saving behavior if that agent receives aggregate labor income. Either there is no saving, when income is a random walk, or saving is contracyclical over the business cycle, when income changes are positively autocorrelated. However, in reality, microeconomic income processes do not resemble their average, and it is possible to construct a model of microeconomic saving under liquidity constraints which, at the aggregate level, reproduces many of the stylized facts in the actual data. While it is clear that many households are not liquidity constrained, and do not behave as described here, the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life-cycle models.

The Political Economy of Trade Policy

Abstract: International trade seems to be a subject where the advice of economists is routinely disregarded. Economists are nearly unanimous in their general opposition to protectionism, but the increase in U.S. protection in recent years in such sectors as automobiles, steel, textiles and apparel, machine tools, footwear and semiconductors demonstrates that economists lack political influence on trade policy. The type of protectionism chosen does not follow economists' advice, either. A frequently asked question on undergraduate trade exams is why a small country's welfare losses are less when it curtails imports with a tariff rather than by negotiating "voluntary" export-restraint agreements (VEAs) with foreign suppliers. Even though generations of students have correctly pointed out that the equivalent of the domestic tax revenues raised by a tariff is transferred as a windfall gain to foreign countries when VEAs are introduced, these agreements are now the preferred means by which countries pursue protectionism. Moreover, if the purpose of protection is to redistribute income to producers, production subsidies (financed by lump-sum taxes) dominate both tariffs and import quotas on efficiency grounds, since the consumption costs of protection are avoided. Yet governments generally prefer to assist industries by providing import protection rather than production subsidies. Economists have tended to attribute such disregard for their policy conclusions to a lack of economic education. However, while many consumers still do not seem to

A Neoclassical Perspective on Budget Deficits

Abstract: I n the 1988 presidential campaign, virtually every serious candidate spoke of the urgent need to trim government budget deficits. Public opinion polls have identified federal deficits as a key economic issue, second only to unemployment. While many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem, others regard the fuss as much ado about nothing. It is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations. Generally speaking, there are three schools of thought concerning the economic effects of budget deficits: Neoclassical, Keynesian, and Ricardian. Before proceeding further, it is useful to review the basic structure and implications of each paradigm. The Neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles. Budget deficits raise total lifetime consumption by shifting taxes to subsequent generations. If economic resources are fully employed, increased consumption necessarily implies decreased saving. Interest rates must then rise to bring capital markets into balance. Thus, persistent deficits "crowd out" private capital accumulation. In the current economic environment, most economists would agree that these consequences would be highly detrimental.

Consumption Growth Parallels Income Growth: Some New Evidence

Abstract: This paper argues that the versions of both permanent income and life-cycle theories which have recently become fashionable are inconsistent with the grossest features of cross-country and cross-section data on consumption and income. There is clear evidence that consumption and income growth are much more closely linked than would be predicted by these theories. it appears that consumption smoothing takes place over periods of several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income component is not to be regarded as expected lifetime earnings... It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness." They call into question the usefulness of standard representative Consumer approaches to the analysis of saving behavior. And they call for increased emphasis on liquidity constraints and short run precautionary saving as determinants of consumption behavior.

Consumption and Capital Market Imperfections: An International Comparison

Abstract: The excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less. Low levels of consumer debt can result either from capital market imperfections or from a low demand for loans. The evidence suggests that the former view is more appropriate than the latter, and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints, rather than to other factors. Copyright 1989 by American Economic Association.

Gasoline consumption and cities: a reply

Abstract: (1989). Gasoline Consumption and Cities: A Reply. Journal of the American Planning Association: Vol. 55, No. 3, pp. 342-346.

Theory of Economic Dynamics: An Essay on Cyclical and Long-Run Changes in Capitalist Economy

Abstract: Foreword Part 1: Degree of Monopoly And Distribution of Income 1 Costs and Prices 2 Distribution of National Income Part 2: Determination of Profits and National Income 3 The Determinants of Profits 4 Profits and Investment 5 Determination of National Income and Consumption Part 3: The Rate of Interest 6 The Short-Term Rate of Interest 7 The Long-Term Rate of Interest Part 4: Determination of Investment 8 Entrepreneurial Capital and Investment 9 Determinants of Investment 10 Statistical Illustration Part 5: The Business Cycle 11 The Mechanism of the Business Cycle 12 Statistical Illustration 13 The Business Cycle and Shocks Part 6: Long-Run Economic Development 14 The Process of Economic Development 15 The Development Factors

International competition, income distribution and economic growth

Abstract: This paper shows that the neo-Keynesian case for wage-led growth does not generally hold in an open economy model. Wage increases cause a loss of competitiveness that reduces the trade balance. If the economy is relatively open to trade and price elasticities satisfy certain restrictions, the worsening of the trade balance more than outweighs the increase in workers' consumption, thus reducing the growth rate. The main theoretical innovation is a flexible markup pricing rule that allows changes in unit labor costs and exchange rates to affect profit margins. Implications for international relations and class conflict are discussed. Copyright 1989 by Oxford University Press.

Lifetime incidence and the distributional burden of excise taxes

Abstract: This implies that low-income households in one year have some chance of being higher-income households in other years, and significantly affects the estimated distributional burden of excise taxes. This paper shows that household expenditures on gasoline, alcohol, and tobacco as a share of total consumption (a proxy for lifetime income) are much more equally distributed than expenditures as a share of annual income. From a longer-horizon perspective, excise taxes on these goods are therefore much less regressive than standard analyses suggest.

Looking for Boy-Girl Discrimination in Household Expenditure Data

Abstract: The ability to test for discrimination in the allocation of goods between boys and girls is hampered by a lack of data on intrahousehold distribution. The analysis presented here allows inferences about intrahousehold allocation to be made from householdlevel expenditure data. For a given level of income, families with children will spend less on adult goods in order to purchase children's goods. If household purchasing favors boys over girls, smaller expenditures on adult goods would be made by families with boys as compared with those with girls. A method for determining "adult" goods is described, and the procedure for detecting gender bias is applied to data from C6te d'lvoire and Thailand. The data show no evidence of discriminatio n between boys and girls in C6te d'lvoire, and a small and statistically insignificant bias in favor of boys in Thailand. How commodities are allocated among the members of a household has recently occasioned a good deal of interest. Assessments of poverty and income distribution based on household incomes or expenditures will be misleading if allocation within the household is unequal. The position of women and girls has been of particular concern, and there is a considerable amount of empirical evidence, much of it from the Indian subcontinent, that documents discrimination against females (see in particular Bhagwati 1973; Sen 1984; Sen and Sengupta 1983; Miller 1981; Bardhan 1982; and Kynch and Sen 1983; as well as survey papers by Behrman 1987 and Harriss 1987). Much of the evidence is concerned with measurements of nutritional outcomes, mortality, and health status rather than with the direct allocation of goods by gender. The difficulty in trying to determine the intrahousehold allocation of goods is that household budget surveys, the obvious source of data, record consumption not of individuals but of households. And while attempts can be made to The author is a professor of public affairs and of economics and international affairs at Princeton University and is a consultant to the Population and Human Resources Department of the World Bank. The author thanks Dwayne Benjamin who provided for excellent research assistance. He is grateful to him and to members of the Economic Growth Center at Yale University for helpful comments. This is a revised and shortened version of Living Standards Measurement Study Working Paper 39, "The Allocation of Goods within the Household: Adults, Children, and Gender," June 1987. The results from Thailand were not included in the working paper. © 1989 The International Bank for Reconstruction and Development / THE WORLD BANK.

Modelling household energy expenditures using micro-data*

Abstract: This paper is concerned with the empirical modeling of domestic demand for energy in the United Kingdom at the level of the individual household. A two-stage budgeting model of household demand for energy conditional on durable ownership is developed. At the first stage, income is allocated between energy and nonenergy consumption, while at the second stage, energy expenditure is disaggregated. The second-stage allocation is assumed to be between gas, electricity, and a composite good "other fuels." Estimation takes place using a sample of some 50,000 households drawn from the annual U.K. Family Expenditure Survey for the years 1972-83, a source that has not been fully exploited in the analysis of energy demand to date. Copyright 1989 by Royal Economic Society.