Showing papers on "Consumption (economics) published in 1994"

Risk and Insurance In Village India

Abstract: The full insurance model is tested using data from three poor, high risk villages in the semi-arid tropics of southern India. The model presented here incorporates a number of salient features of the actual village economies. Although the model is rejected statistically, it does provide a surprisingly good benchmark. Household consumptions comove with village average consumption. More clearly, household consumptions are not much influenced by contemporaneous own income, sickness, unemployment, or other idiosyncratic shocks, controlling for village consumption (i.e. for village level risk). There is evidence that the landless are less well insured than their village neighbors in one of the three villages.

Risk-Taking, Global Diversification, and Growth

Abstract: This paper develops a continuous-time stochastic model in which international risk-sharing can yield substantial welfare gains through its effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe low-yield capital to riskier high-yield capital. The presence of these two types of capital captures the idea that growth depends on the availability of an ever-increasing array of specialized, hence inherently risky, production inputs. Calibration exercises using consumption and stock-market data imply that most countries reap large steady-state welfare gains from global financial integration. Copyright 1994 by American Economic Association.

Intertemporal Choice and Inequality

Abstract: The permanent income hypothesis implies that, for any cohort of people born at the same time, inequality in both consumption and income should grow with age. We investigate this prediction using cohort data constructed from 11 years of household survey data from the United States, 22 years from Great Britain, and 14 years from Taiwan. The data show that within-cohort consumption and income inequality measures do indeed increase with age in the three economies and that the rate of increase is similar in all three. According to the permanent income hypothesis, the increase in inequality reflects cumulative differences in the effects of luck on consumption. Other models of intertemporal choice-such as those with strong precautionary motives or liquidity constraints-can limit or even prevent the spread of inequality, as can insurance arrangements that share risk across individuals. The evidence on the spread of inequality can therefore be used to help quantify the extent to which private and social arrangements moderate the impact of risk on the distribution of individual welfare.

Poverty and household size

Abstract: The widely held view that larger families tend to be poorer in developing countries has influenced research and policies. But the basis for this"stylized fact"is questionable, the authors argue. Widely cited evidence of a strong negative correlation between size and consumption per person is unconvincing, given that even poor households face economies of size in consumption. The authors find that the correlation between poverty and household size vanishes in Pakistan when the size elasticity of the cost of living is about 0.6. This turns out to be the elasticity implied by a modified version of the food-share method of setting scales. By contrast, some measures of child nutritional status indicate an elasticity closer to unity. Consideration of the weight attached to child versus adult welfare may help resolve the nonrobustness of demographic profiles of poverty. The authors show that the incidence of severe child stunting is more elastic to household size than their Engel curve estimate suggests, although the latter is still a fair predictor of child wasting. A consideration of the purpose of measuring poverty - notably the extent to which it is used to inform policies aimed at promoting child welfare - may go some way toward resolving the issues.

Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey

Abstract: In this paper we show that some of the predictions of models of consumer intertemporal optimization are not inconsistent with the patterns of non-durable expenditure observed in US household-level data Our results and our approach are new in several respects First, we use the only US micro data set which has direct and complete information on household consumption The microeconomic data sets used in most of the consumption literature so far contained either very limited information on consumption (like the PSID) or none at all, in which case consumption had to be obtained indirectly from income and changes in assets Second, we propose a flexible and novel specification of preferences which is easily estimable and allows a general treatment jof multiple commodities We show that aggregation over commodities can be important, both theoretically and in practice Third, we present empirical results that show that it is possible to find a reasonably simple specification of preferences, which controls for the effects of changes in demographics and labor supply behavior over the life cycle and which is not rejected by the available data On our preferred specification, we obtain sharp estimates of key behavioral parameters (including the elasticity of intertemporal substitution) and no rejections of theoretical restrictions Our results contrast sharply with most of the previous evidence, which has typically been interpreted as rejection of the theory We show that previous rejections can be explained by the simplifying assumptions made to derive empirically tractable equations We also show that results obtained using food consumption or aggregate data can be extremely misleading

Does Consumer Sentiment Forecast Household Spending? If So, Why?

Abstract: In the three months following the Iraqi invasion of Kuwait, the University of Michigan's Index of Consumer Sentiment (ICS) fell an unprecedented 24.3 index points, to its lowest level since the 1981-1982 recession.' This collapse in household confidence became the focus of a great deal of economic commentary and, indeed, frequently was cited as an important-if not the leading-cause of the economic slowdown that ensued. Concern was fueled by the well-known contemporaneous correlation between the ICS and the growth of household spending. Figure 1 shows quarterly averages of the index, 1978-1993, together with the quarterly growth in real personal consumption expenditures as measured in the national income accounts (Bureau of Economic Analysis). The correlation is impressive. Of course, it is not surprising that sentiment and the growth of spending are positively correlated. This correlation may simply reflect that, when economic prospects are poor, households curtail their spending and also give gloomy responses to interviewers. Thus, the contemporaneous correlation between sentiment and spending does not refute traditional life-cycle or permanentincome models of consumption. Nor does it necessarily make the job of forecasting changes in consumption any easier. From the point of view of an economic forecaster, the questions of interest are first, whether an index of consumer sentiment has any predictive power on its own for future changes in consumption spending, and second, whether it contains information about future changes in consumer spending aside from the information contained in other available indicators. In Section I, we present evidence that the answer to the first question is a clear yes: we find that lagged values of the ICS, taken on their own, explain about 14 percent of the variation in the growth of total real personal consumption expenditures over the post1954 period. Further investigation shows that the answer to the second question is probably yes as well, though here the margin is narrower and the evidence more murky. The ICS contributes about 3 percent to the R2 of a simple reduced-form equation for total personal consumption expenditures in the longer of the two sample periods we examine, but nothing in the shorter sample period (though the latter result is heavily influenced by the observation for 1980:2). For the major subcategories of spending, the contribution generally ranges between 1 percent and 8 percent. Overall, we read the evidence as pointing toward at least some significant incremental explanatory power. Therefore, we take as given for the remainder of the paper that sentiment forecasts spending, and we turn to the issue of how that statistical relationship should be interpreted. One possible interpretation is that sentiment is an independent driving factor in the economy, and that changes in * Carroll: Division of Research and Statistics, Stop 80, Federal Reserve Board, Washington, DC 20551: Fuhrer: Research Department, Federal Reserve Bank of Boston, Boston, MA 02106: Wilcox: Division of Monetary Affairs, Stop 71, Federal Reserve Board, Washington, DC 20551. We have benefited from the research assistance of Stephen Helwig and Christopher Geczy and the comments of an anonymous referee. The views expressed in this paper are those of the authors and not of the Federal Reserve Board, the Federal Reserve Bank of Boston, or the other members of the staff of either institution. IThe Conference Board's Consumer Confidence Index also plunged at the same time.

The Consumption Smoothing Benefits of Unemployment Insurance

Abstract: Previous research on unemployment insurance (UI) has focused on the costs of the program, in terms of the distorting effects of generous UI benefits on worker and firm behavior. For assessing the optimal size of an unemployment insurance program, however, it is also important to gauge the benefits of increased UI generosity, in terms of smoothing consumption across periods of joblessness. I do so through a reduced form approach which directly measures the effect of legislated variations in UI benefits on consumption changes among individuals becoming unemployed. I use annual observations on food consumption expenditures for 1968-1987 from the Panel Study of Income Dynamics, matched to information on the UI benefits for which unemployed persons were eligible in each state and year. I estimate that a 10 percentage point increase in the UI replacement rate leads to a consumption fall upon unemployment which is 2.7% smaller. Over this period, the average fall in consumption for the unemployed was 7%; my results imply that, in the absence of unemployment insurance, this fall would have been over three times as large. I also find that the positive effect of UI only extends for one period, smoothing consumption during initial job loss but having no permanent effect on consumption levels; that individuals who anticipate layoff see a smaller consumption smoothing effect; and that UI appears to somewhat crowd out other forms of public consumption insurance. Despite the substantial estimated consumption smoothing effect, however, my results imply that the optimal UI benefit level is within the range of current replacement rates only at fairly high levels of risk aversion.

An Overlapping Generations Model of Growth and the Environment

Abstract: This chapter analyses the potential conflict between economic growth and the maintenance of environmental quality in an overlapping generations model. Since environmental damage may outlive its perpetrators, overlapping generations’ models provide an appropriate demographic structure for analysis of environmental externalities. In general, environmental externalities could arise from production or consumption and could affect welfare or productivity. The chapter identifies interior equilibrium without external increasing returns and considers equilibrium with external increasing returns. Increased saving benefits generations through the external increasing returns, and hurts generations through reduced maintenance and greater consumption; higher saving is desirable if the first effect dominates. The dynamics of the economy therefore imply a negative correlation between environmental quality and growth under zero maintenance, in contrast to the positive correlation at interior equilibrium. Agents in economies with little capital or with high environmental quality may choose not to engage in maintenance of the environment.

Do the poor insure? A synthesis of the literature on risk and consumption in developing countries

Abstract: Income risk is a central feature of rural areas of developing countries. A major topic in development economics is how well households are able to mitigate the adverse effects of income risk. There are several sensible reasons why households will not be able to fully insure consumption against income fluctuations. The well-known problems of moral hazard, information asymmetries, and deficiencies in the ability to enforce contracts may result in incomplete or absent insurance markets. The dearth of formal insurance markets in developing countries is evidence that these problems are considerable. However, a large body of literature indicates that households in developing countries make use of a wide variety of mechanisms, often informal, to at least partially limit consumption risk. A key piece of information required to guide policy design is how, and how well, different households mitigate risk. This paper reviews various strategies for insuring consumption against income fluctuations, and examines evidence on how effectively these strategies work.

Consumption and the world of goods

Abstract: 1. Introduction 2. Problems, Methods and Concepts, Jean Christophe Agnew 3. Goods and Consumption 4. Production and the Meaning of Possessions 5. Literacy and Numeracy 6. The Consumption of Culture: Books and Newspapers 7. Consumption, Objects and Images.

How does Future Income Affect Current Consumption

Abstract: This paper tests a straightforward implication of the basic Life Cycle model of consumption: that current consumption depends on expected lifetime income. The paper projects future income for a panel of households and finds that consumption is closely related to projected current income, but unrelated to predictable changes in income. However, future income uncertainty has an important effect: consumers facing greater income uncertainty consume less. The results are consistent with "buffer-stock" models of consumption like those of Deaton [1991] or Carroll [1992a, 1992b], where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income.

Measuring Socioeconomic Status in Studies of Child Development.

Abstract: Income is more difficult to measure fully and accurately than occupation. Detailed occupational codes may be mapped into standard socioeconomic scales, and occupational status is related to other variables in much the same way as repeated or long-term measures of income. For these reasons, whether or not an attempt has been made to measure income, the measurement of socioeconomic status may be improved by ascertaining the occupation (and industry) of a job held by 1 or both parents. Income and household composition are preferable to the official poverty line in classifying economic standing, and housing tenure is a simple and powerful measure of economic consumption. Wherever possible, paternal as well as maternal education should be ascertained. However well they are measured, race-ethnicity and socioeconomic status do not capture all of the effects of family background.

The Welfare State and Competitiveness

Abstract: In all modern industrial countries, redistributive expenditures are a larger component of the government budget than consumption of goods and services. In this paper, we use a general equilibrium, two- country model with exportables, importables and nontradables to study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation. We show that an increase in transfers to, say, retirees, financed by distortionary taxation, can generate a loss of competitiveness (defined as an increase in relative unit labor costs for tradable goods), an appreciation of the relative price of nontradables, and a decrease in employment in all sectors of the domestic economy. The same qualitative effects would also obtain in the case of an increase in transfers towards the unemployed even if financed by non-distortionary taxation. Moreover, all these effects of labor taxation depend in a nonlinear way on the degree of centralization of the wage setting process in the labor market. We then estimate the effects of labor taxation on unit labor costs and the relative price of nontradables in a sample of 14 OECD countries. We find considerable empirical support for the model.

Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries

Abstract: Income risk is a central feature of rural areas of developing countries. A major topic in development economics is how well households are able to mitigate the adverse effects of income risk. There are several sensible reasons why households will not be able to fully insure consumption against income fluctuations. The well-known problems of moral hazard, information asymmetries, and deficiencies in the ability to enforce contracts may result in incomplete or absent insurance markets. The dearth of formal insurance markets in developing countries is evidence that these problems are considerable. However, a large body of literature indicates that households in developing countries make use of a wide variety of mechanisms, often informal, to at least partially limit consumption risk. A key piece of information required to guide policy design is how, and how well, different households mitigate risk. This paper reviews various strategies for insuring consumption against income fluctuations, and examines evidence on how effectively these strategies work.

Using Shadow Wages to Estimate Labor Supply of Agricultural Households

Abstract: With few exceptions, most studies of the labor demand and supply decisions of agricultural households in developing countries have relied on the empirical advantages of separability. Given the questionable nature of some of the assumptions sufficient for separability, I apply a recent methodology that accounts for the simultaneity between the production and consumption decisions of a farm household. Using data from rural India, direct estimates of the marginal productivities (shadow wages) of family male and female labor are derived from a Cobb-Douglas agricultural production function. The estimated shadow wages and income are then used as regressors in a structural model of labor supply.

Consumer confidence and rational expectations: are agents' beliefs consistent with the theory?

Abstract: Consumer confidence is found to have predictive content for a wide range of macroeconomic variables including consumption growth, contrary to standard REPIH. We find that on UK data the REPIH is rejected due to the predictive content of consumer confidence, and not labour income. We explain this finding in terms of precautionary behaviour. Extending the Hansen and Singleton Consumption CAPM model to allow a conditional variance we find a high level of confidence is associated with both greater optimism about the level of consumption and greater uncertainty about the forecaster variance. Once allowance is made for time aggregation the over identifying restrictions implied by this model are accepted. We estimate a small but statistically significant intertemporal elasticity of substitution.

Economic Conditions and Alcohol Problems

Abstract: This study investigates the relationship between macroeconomic conditions and two alcohol-related outcomes -- liquor consumption and highway vehicle fatalities. Fixed-effect models are estimated for the 48 contiguous states over the 1975-1988 time period and within-state variations are the focus of analysis. Alcohol consumption and traffic deaths vary procyclically, with a major portion of the effect of economic downturns attributed to reductions in incomes. The intake of hard liquor is the most sensitive to the state of the macroeconomy. There is no evidence, however, that fluctuations in economic conditions have a disproportionate impact on the drunk-driving of young adults.

The UK Consumption Boom of the Late 1980s: Aggregate Implications of Microeconomic Evidence

Abstract: Two competing explanations of the UK consumer boom in the late 1980s are the financial liberalisation-imperfect housing market hypothesis of Muellbauer and Murphy and the expectations hypothesis of King. We use 15 years of Family Expenditure Surveys, and cohort analysis, to investigate to what extent these two hypotheses agree with observed changes in consumption patterns. We find that the housing markets explanation accounts for much of the increase by older cohorts, but cannot be reconciled with the marked rise in expenditure levels of younger households. A simple simulation exercise shows instead that the expectations hypothesis can generate increases of expenditure by young consumers of the magnitude observed in our data.

The Resources of Poverty: Women and Survival in a Mexican City

Abstract: 1. The Resources of Poverty. Urban Households, Survival and Reproduction. 2. Guadalajara and Working-Class Households. Characteristics and Differences. 3. The Domestic Cycle. 4. Patterns of Consumption. 5. The Household: A Contradictory Unity. 6. Working-Class Women in Guadalajara. 7. Single-Parent Households. 8. The Penalties of Social Isolation. 9. Self-Construction, Self-Urbanization: Political Cooptation.

Computer-assisted sales system for utilities

Abstract: A computer-based system for generating customized proposals relating to consumption and cost of utilities. The system receives and stores information related to a utility company's services and conservation programs, utility rates, and a customer's inventory. The system processes this information in order to determine how various factors and parameters will affect the customer's utility consumption and cost. As a result of this processing, the system generates a customized proposal for the customer relating to how the customer can reduce consumption and cost of utilities.