Showing papers on "Consumption (economics) published in 1990"

Habit Formation: A Resolution of the Equity Premium Puzzle

Abstract: The equity premium puzzle, identified by Mehra and Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.

Asset Prices under Habit Formation and Catching Up with the Joneses

Abstract: This paper introduces a utility function that nests three classes of utility functions: (1) time-separable utility functions; (2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and (3) utility functions that display habit formation. Closed-form solutions for equilibrium asset prices are derived under the assumption that consumption growth is i.i.d. The equity premia under catching up with the Joneses and under habit formation are, for some parameter values, as large as the historically observed equity premium in the United States

Nonexpected Utility in Macroeconomics

Abstract: This paper introduces, within the context of an infinite optimal consumption problem, a parametric class of Kreps-Porteus nonexpected utility preferences--generalized isoelastic utility--which distinguishes attitudes toward risk from behavior toward intertemporal substitution. Some of the theoretical and empirical implications for macroeconomics of these state- and time-nonseparable preferences are examined. Copyright 1990, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

An Empirical Analysis of Cigarette Addiction

Abstract: To test a model of rational addiction, we examine whether lower past and future prices for cigarettes raise current cigarette consumption. The empirical results tend to support the implication of addictive behavior that cross price effects are negative and that long-run responses exceed short-run responses. Since the long-run price elasticity of demand is almost twice as large as the short-run price elasticity, the long-run increase in tax revenue from an increase in the federal excise tax on cigarettes is considerably smaller than the short-run increase. (JEL Dll, D12, 110).

Who is Credit Constrained in the U. S. Economy

Abstract: An important assumption of the life-cycle model of consumption is the postulate of perfect capital markets. This hypothesis has recently been challenged by substantial empirical evidence. Hall and Mishkin [1982], using the Panel Study of Income Dynamics, estimate that 20 percent of United States families are liquidity constrained. Mariger [1986] derives a life-cycle model with endogenous liquidity constraints and, using a cross section, estimates this fraction to be 19.4 percent. Hubbard and Judd [1986] simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences, 19.0 percent of United States consumers are liquidity constrained. The emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life-cycle model. In addition, Hayashi [1985] and Zeldes [1989] investigate the correlation among consumption, wealth, and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving. The main limitation of these studies is that, in their data sets, constrained consumers are not observable and have to be identified via indirect evidence. Thus, there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained. This paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable, and explicitly links their existence to credit market imperfections and personal characteristics. The data, drawn from the 1983 Survey of Consumer Finances (SCF) and described in Section II, provide information on individuals whose request for credit has been rejected by financial intermediaries. In Section III a model is developed in which consumers' and lenders' behavior jointly determines the probability that a consumer is rationed in the credit market. This probability is then

Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries

Abstract: According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption. Only the empirical evidence can distinguish which view is the more appropriate, that is, how often the contractionary effect of a fiscal consolidation prevails over its expansionary expectational effect. This paper presents new evidence, drawing on the European exercise in fiscal rectitude of the 1980s and focusing on its two most extreme cases, Denmark and Ireland. We find that at least in the experience of these two countries the "expectations" view has a serious claim to empirical relevan.

Permanent Income, Current Income, and Consumption

Abstract: This article reexamines the consistency of the permanent-income hypothesis with aggregate postwar U.S. data. The permanent-income hypothesis is nested within a more general model in which a fraction of income accrues to individuals who consume their current income rather than their permanent income. This fraction is estimated to be about 50%, indicating a substantial departure from the permanent-income hypothesis. Our results cannot be easily explained by time aggregation or small-sample bias, by changes in the real interest rate, or by nonseparabilities in the utility function of consumers.

The Effect of Purchase Quantity and Timing on Variety-Seeking Behavior:

Abstract: Two consumer strategies for the purchase of multiple items from a product class are contrasted. In one strategy (simultaneous choices/sequential consumption), the consumer buys several items on one...

Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods

Abstract: We analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. As a consequence, the consumption based capital asset pricing model fails to hold. Nevertheless, it is shown that the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. It is shown that the optimal durable level is characterized by three numbers (not random variables), say x, y, and z (where $x ). The consumer views the ratio of consumption to wealth (c/W) as his state variable. If this ratio is between x and z, then he does not sell the durable. If c/W is less than x or greater than z, then he sells his durable and buys a new durable of size S so that S/W = y. Thus y is his "target" level of c/W. If the stock market moves up enough so that c/W falls below x, then he sells his small durable to buy a larger durable. However, there will be many changes in the value of his wealth for which c/W stays between x and z, and thus consumption does not change. Numerical simulations show that small transactions costs can make consumption changes occur very infrequently. Further, the effect of consumption transactions costs on the demand for risky assets is substantial.

A Fuzzy Approach To The Measurement Of Poverty

Abstract: Well-known indices for the measurement of poverty traditionally refer to income (or to other economic variables, such as consumption) and to the conventional definition of a poverty line (see, e.g., Sen 1976; Carbonaro 1982; Foster 1984; Atkinson 1987; Hagenaars 1987; Pyatt 1987; Dagum et al. 1988; Cerioli 1989).

The Relationship between Credit and Productivity in Chinese Agriculture: A Microeconomic Model of Disequilibrium

Abstract: Credit is an important element in agricultural production systems. It allows producers to satisfy the cash needs induced by the production cycle which characterizes agriculture: preparation, planting, cultivation, and harvesting of the crops are typically done over a period of several months in which very little cash revenue is earned, while expenditures on materials, purchased inputs, and consumption must be made in cash. Cash income is received a short time after the harvest. In the absence of credit markets, farmers would have to maintain cash reserves so as to facilitate production and consumption in the next cycle. The availability of credit allows both greater consumption and greater purchased input use and thus increases welfare of the farmers.

Mean Reversion in Equilibrium Asset Prices

Abstract: This paper demonstrates that negative serial correlation in long-horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the Monte Carlo distributions implied by the authors equilibrium model. From this evidence, the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model. Copyright 1990 by American Economic Association.

A Model of the Demand for Longevity and the Value of Life Extension

Abstract: We specify a demand function for longevity, or "quantity of life," along with corresponding demand functions for indicators of "quality of life" and a value-of-health and life extension function. We show that the demand for health must be derived in conjunction with that for longevity and the related consumption plan, and that all choices depend on initial individual endowments and terminal conditions. Our comparative dynamics predictions indicate that optimal health and longevity are increasing functions of endowed wealth rather than, necessarily, current income; that improvements in opportunities to produce health can accentuate the differences between endowed health and attained longevity levels; and that the value individuals ascribe to their health may be increasing over a good portion of their life cycle. We use this model to analyze observed empirical variations in levels and trends of life expectancy and in exposure to health risks across different population groups.

The Cost of Annuities: Implications for Saving Behavior and Bequests

Abstract: The fact that most elderly U S individuals maintain a flat age-wealth profile, rather than buy individual life annuities, contradicts the standard life-cycle consumption model Average expected yields on individual life annuities in the United States during 1968–1983 were lower by 421–613 percent, or 243–435 percent after allowing for adverse selection, than yields on plausible alternative investments Simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive At older ages the combination of such yield differentials and a bequest motive can do so It is common experience that as we grow older and nearer to eternity we become more, not less, anxious about money [Derek Brewer, Chaucer and His World, p 213]

The Homeless in America: An Examination of Possessions and Consumption Behaviors

Abstract: This research utilized an ethnographic approach to advance our understanding of the survival strategies employed by the homeless in our society. We examine the types of possessions consumed, how possessions are acquired through nontraditional employment and scavenging, and why some products are purchased while others are scavenged. We also look at the tools used to facilitate search, acquisition, storage, and consumption of these products. Finally, we consider the importance of community for protection of self and possessions and how community among the homeless affects consumption. Emergent themes that allow interpretation of the description are presented.

The pre-industrial consumer in England and America

Abstract: Pre-industrial consumer: Part I: Demand: Household production in early modern England Household production in colonial America Changes in consumer demand Part II: Trends in consumption and standards of living: Food consumption, new commodities, and the transformation in diet Housing, consumer durables, and the domestic environment Part III: Distribution: Hierarchically structured demand and distribution The rise of the English country shop Colonial retailing Conclusion: Economic history, economic theory, and consumption.

An inquiry into the compulsive side of “normal” consumers

Abstract: This article reports on a study designed to investigate the nature of compulsive-like buying behavior in the general consumer population. A previously tested compulsive buying scale was administered to a sample of 190 consumers. As predicted by the hypotheses, compulsive buying tendencies correlate negatively with self-esteem and positively with the extent of irrational credit card usage. Several other findings are reported and discussed. Thus women are shown to be higher on compulsive buying than men. Also, compuslive buying tendencies correlate negatively with age and positively with one's susceptibility to social influence. Finally, the data suggest that early consumption experiences may affect significantly the extent of compulsive-like buying behavior. Areas where further research should be done are identified.

Implications of credit constraints for risk behaviour in less developed economies

Abstract: DOES the capacity to absorb risk stem only from something innate-a psychological trait or preference structure? The purpose of this paper is to suggest that the ability to smooth out consumption over time, with one's own wealth or through access to consumption credit, may be an important determinant of risk-bearing capacity. We show that if individuals have identical risk preferences, those with access to greater amounts of consumption credit will have greater capacity to absorb risk. The above result does not have implications of much significance in economies characterized by capital markets so well developed that all individuals have access to adequate amounts of consumption credit. The same thing can be said of economies which have reached a level of affluence (and hence a level of individual savings) that makes borrowing for consumption purposes unnecessary. But the result does acquire significance in many less developed countries where the accumulated savings of the poorer segments of the society are entirely inadequate to prevent significant downswings in consumption in the bad states of nature. Moreover, the distribution of access to credit in less developed countries is notoriously skewed across the population. We assume that individuals are risk-averse. In the particular characterization of risk preferences which is appropriate to the intertemporal context, risk-averse individuals prefer a smooth consumption profile over time to an uneven one. An agent who is either wealthy or has considerable access to credit can disengage each period's consumption from the income realized in that period: when the income draw is poor he can either dissave or borrow, and when the draw is good he can either replenish his wealth or repay the debt. The capacity to bear risk, in this view, is derived from the ability to stabilize consumption over time. Put differently, the cost of risk to an individual can be reduced if he could pool risks over time. Wealth or access to capital enables him to do precisely this. Thus, even when all agents have identical risk preferences, differential risk behaviour would still obtain if the agents have differential access to capital. This paper formalizes the above idea. Two key features of our view are: (a) the essentially intertemporal nature of risk-bearing, and (b) the peculiarity of captial markets as manifest in differential access to credit across agents. The intertemporal nature of risk-bearing is eminently reasonable since, in reality, the effects of even a one-period gamble are spread out across several periods. Moreover, many important decisions under uncertainty entail sequences of gambles rather

Access to Capital and Its Impact on Agrarian Structure and Productivity in Kenya

Abstract: Access to capital and its distribution across agents can profoundly shape the structure and performance of an agrarian market economy.' It is conceptually useful to distinguish between ex ante and ex post capital access. Ex ante capital access denotes the ability of agents to finance production costs (e.g., labor and purchased inputs costs) which must be paid ex ante, that is, prior to the actual realization of production. Ex post capital access, that is access to capital after the realization of the production process, is of particular importance as an insurance substitute in low income agrarian economies where contingency markets are imperfect. Buoyant ex post capital access would permit an individual to stabilize consumption year to year even as production fluctuates annually. A number of theoretical models have ex-

Existence and Uniqueness of Multi-Agent Equilibrium in a Stochastic, Dynamic Consumption/Investment Model

Abstract: We consider an economy in which a set of agents own productive assets which provide commodity dividend streams, and the agents also receive individual commodity income streams, over a finite time horizon. The agents can buy and sell the commodity at a certain spot price and buy and sell their shares of the productive assets. The proceeds can be invested in financial assets whose prices are modelled as semimartingales. Each agent's objective is to choose a commodity consumption process and to manage his portfolio so as to maximize the expected utility of his consumption, subject to having nonnegative wealth at the terminal time. We derive the optimal agent consumption and investment decision processes when the prices of the productive assets and commodity spot prices are specified. We prove the existence and uniqueness of an "equilibrium" commodity spot price process and productive asset prices. When the agents solve their individual optimization problems using the equilibrium prices, all of the commodity is exactly consumed as it is received, all of the productive assets are exactly owned and the financial markets are in zero net supply.

Arming as a Strategic Investment in a Cooperative Equilibrium

Abstract: To develop a positive, economic theory of military spending, this analysis focuses on a game-theoretic, general equilibrium model of international conflict, in which consumption, peaceful investment, and military spending are endogenously determined. The analysis illustrates that when there is repeated interaction between nations, a game of threats and punishments generally will not support a disarmament outcome and that fluctuations in military spending can be an endogenous result of fluctuations in aggregate economic activity. Furthermore, the analysis shows how the relation between aggregate economic activity and military spending qualitatively depends on whether governments are acting opportunistically or cooperatively. Copyright 1990 by American Economic Association.

Perspectives on Consumer Culture

Abstract: Three accounts of consumer culture are discussed in this paper. The first one, the production of consumption perspective, presents the culture which develops around the accumulation of commodities as leading to greater manipulation and control. The second, the mode of consumption perspective, focuses upon the way in which goods are variably used to create distinctions and reinforce social relationships. The third perspective examines the emotional and aesthetic pleasures, the desires and dreams generated within particular sites of consumption and by consumer culture imagery. In addition the paper discusses the alleged tendencies towards cultural disorder and de-classification within consumer culture which some refer to as postmodernism.

Permanent Income, Current Income, and Consumption

Abstract: This article reexamines the consistency of the permanent-income hypothesis with aggregate postwar U.S. data. The permanent-income hypothesis is nested within a more general model in which a fraction of income accrues to individuals who consume their current income rather than their permanent income. This fraction is estimated to be about 50%, indicating a substantial departure from the permanent-income hypothesis. Our results cannot be easily explained by time aggregation or small-sample bias, by changes in the real interest rate, or by nonseparabilities in the utility function of consumers.

Permanent and Transitory Movements in Labor Income: An Explanation for "Excess Smoothness" in Consumption

Abstract: Many have argued that if labor income is difference stationary, the permanent income hypothesis predicts that consumption should be relatively volatile. In U.S. aggregate data, labor income is well characterized as having a unit root; however, consumption turns out to be relatively smooth. This anomaly is known as Deaton's paradox. I resolve Deaton's paradox by providing decompositions of labor income into permanent and transitory components. These preserve the univariate dynamic properties of labor income. However, when agents distinguish permanent and transitory movements in their labor income--as the rational expectations hypothesis asserts they should--the permanent income hypothesis correctly predicts the observed smoothness in consumption.