Showing papers on "Consumption (economics) published in 1996"

Why Do More Open Economies Have Bigger Governments

Abstract: This paper demonstrates that there is a robust empirical association between the extent to which an economy is exposed to trade and the size of its government sector. This association holds for a large cross-section of countries, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. The explanation appears to be that government consumption plays a risk-reducing role in economies exposed to a significant amount of external risk. When openness is interacted with explicit measures of external risk, such as terms-of-trade uncertainty and product concentration of exports, it is the interaction terms that enter significantly, and the openness term that loses significance (or turns negative). The paper also demonstrates that government consumption is the ‘safe’ activity, in the empirically relevant sense, in the vast majority of countries.

Household Saving: Micro Theories and Micro Facts

Abstract: In this survey, we review the recent theoretical and empirical literature on household saving and consumption. The discussion is structured around a list of motives for saving and how well the standard theory captures these motives. We show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model. Particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior. We also discuss the "behavioral" or "psychological" approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving. We provide a section on facts: who save and how much. We then discuss informally the recent decline in the U.S. saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time. We do not find any convincing explanation for the change in saving rates. We also discuss some analyses of saving behavior over the life-cycle, addressing such questions as whether households save "enough" for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model. We also review a great number of studies of the consumption Euler equations. Based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income. We also examine in depth the recent empirical literature on the precautionary motive. We conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle, this motive is not so strong empirically as some investigators suggest.

Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis

Abstract: This paper argues that the typical household's saving is better described by a buffer-stock version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient In the traditional model consumption growth is determined solely by tastes; in contract buffer-stock consumers set average consumption growth equal to average labor income growth regardless of tastes The model can explain three empirical puzzles: the consumption/income parallel of Carroll and Summers [1991]; the consumption/income divergence first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes

The world of goods : towards an anthropology of consumption

Abstract: This revised edition with new Introduction from a leading anthropologist and an economist is unique in being about consumption but not a sermon for consumers, nor a moan against consumerism. The World of Goods bridges the gap between what anthropologists know about why objects are desired and what economists say about the specialised topic called consumption behaviour. The economist treats the desire for objects as an individual urge grounded in psychology; according to the anthropologist it is for fulfilling social obligations and represents the distribution of goods as a symptom of the form of society. It is a totally different perspectice and raises issues that lie beyond economics. The World of Goods asks new questions about why people save, why they spend, what they buy, and why they sometimes but not always make fine distinctions about quality. It is well-understood now that consumption goods communicate, create identity and establish relationships. But not so well-known that goods exclude as well as include, and that the pattern of their flow shows up the form of society. This book will be essential reading to students and lecturers in anthropology and economics.

Asset Pricing with Heterogeneous Consumers

Abstract: Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free asset prices, dividends, and aggregate income, satisfying a certain joint restriction, it is shown that this process is supported in the equilibrium of an economy with judiciously modeled income heterogeneity. The Euler equations of consumption in a representative-agent economy are replaced by a set of Euler equations that depend not only on the per capita consumption growth but also on the cross-sectional variance of the individual consumers' consumption growth.

Why Do Open Economies Have Bigger Governments

Abstract: This paper demonstrates that there is a robust empirical association between the extent to which an economy is exposed to trade and the size of its government sector. This association holds for a large cross-section of countries, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. The explanation appears to be that government consumption plays a risk-reducing role in economies exposed to a significant amount of external risk. When openness is interacted with explicit measures of external risk, such as terms-of-trade uncertainty and product concentration of exports, it is the interaction terms that enter significantly, and the openness term loses its significance (or turns negative). The paper also demonstrates that government consumption is the majority of countries.

Mental Budgeting and Consumer Decisions

Abstract: Consumers often set budgets for categories of expenses (e.g., entertainment) and track expenses against their budget. Because budgets cannot perfectly anticipate consumption opportunities, people may earmark too much or too little money for a particular category. This leads them to overconsume or underconsume goods in that category. The results of three studies suggest that consumers do indeed set budgets and that budgeting may lead to underconsumption. To show that consumers track expenses, the studies demonstrate that budgeting effects are larger for purchases that are highly typical of their category. Such purchases reduce the amount people spend in a category and block the purchase of other typical items. The studies control for satiation and income effects; thus, budgeting adds predictive power to standard economic consumer theory.

Drought and Saving in West Africa: Are Livestock a Buffer Stock?

Abstract: Households in the west African semi-arid tropics face substantial risk -- an inevitable consequence of engaging in rainfed agriculture in a drought-prone environment. It has long been hypothesized that these households keep livestock as a buffer stock to insulate their consumption from income fluctuations income. This paper tests this hypothesis. Results indicate that livestock transactions play less of a consumption smoothing role than often assumed. Livestock sales compensate for at most thirty percent, and probably closer to twenty percent of income shortfalls due to village-level shocks alone. We discuss possible explanations for these results and suggest directions for future work.

International Migration and Development in Mexican Communities

Abstract: The theoretical and empirical literature generally regards international migration as producing a cycle of dependency and stunted development in sending communities. Most migrants' earnings are spent on consumption; few funds are channeled into productive investment. We argue that this view is misleading because it ignores the conditions under which productive investment is likely to be possible and profitable. We analyze the determinants of migrants' savings and remittance decisions, using variables defined at the individual, household, community, and macroeconomic levels. We identify the conditions under which U.S. earnings are repatriated to Mexico as remittances and savings, and indicate the factors leading to their productive investment.

On the concavity of the consumption function

Abstract: At least since Keynes (1935), many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases. Nonetheless, standard perfect-certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth. We show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which, as Keynes suggested, the marginal propensity to consume out of wealth or transitory income declines with the level of wealth.

Relative Wage Movements and the Distribution of Consumption

Abstract: We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.

Risk, Crop Choice, and Savings: Evidence from Tanzania

Abstract: Rural households engaged in agricultural activities face considerable risks in their income process. These income risks are especially important if they result in consumption fluctuations. This is likely if insurance and credit markets are absent. One possible strategy for household is to take up low-risk activities, even if they imply lower returns. Such response cannot be viewed independently from the other options available to households to reduce consumption fluctuations. This paper focuses on the importance of liquid asset formation for risk-taking behaviour by households. An intertemporal model of consumption under liquidity constraints is developed in which households can choose between income activities with different returns and riskiness. It shows that if liquid asset holdings are large, providing a buffer for consumption shortfalls, then households will be more willing to take up high risk activities. Evidence based on survey data from Shinyanga District, Tanzania is presented, consistent with this prediction. (This abstract was borrowed from another version of this item.)

I'd like to buy the world a coke: Consumptionscapes of the “less affluent world”

Abstract: The impact of globalization on the consumption patterns of the Less Affluent World are examined, drawing on examples of consumer culture contact with the More Affluent World. We find that rising consumer expectations and desires are fueled by global mass media, tourism, immigration, the export of popular culture, and the marketing activities of transnational firms. Yet rather than democratized consumption, these global consumption influences are more apt to produce social inequality, class polarizations, consumer frustrations, stress, materialism, and threats to health and the environment. Alternative reactions that reject globalization or temper its effects include return to roots, resistance, local appropriation of goods and their meanings, and especially creolization. Although there is a power imbalance that favors the greater influence of affluent Western cultures, the processes of change are not unidirectional and the consequences are not simple adoption of new Western values. Local consumptionscapes become a nexus of numerous, often contradictory, old, new and modified forces that shape unique consumption meanings and insure that the consumption patterns of the Less Affluent World will not result in Western consumer culture writ globally.

A theory of fertility and parental investment in traditional and modern human societies

Abstract: This paper has two interrelated goals. The first is to offer a general theory of fertility and parental investment across a broad spectrum of human societies. The second is to provide a perspective that unifies traditionally separate domains of anthropology. The basic foundation for the analysis is life history theory and evolutionary biological models of optimal fertility regulation. This tradition is combined with human capital theory in economics to produce a more general theory of investments in embodied capital within and between generations. This synthesis results in a series of optimality models to examine the decision processes underlying fertility and parental investment upon which natural selection is expected to act. Those models are then applied to the hunting and gathering lifeway. This analysis focuses both on problems that all hunting and gathering peoples face and on the production of variable responses in relation to variable ecologies. Next, this consideration of optimal parental investment and fertility behavior in hunter-gatherers is united with existing models of the proximate determinants of human fertility. The analysis of proximate mechanisms is based on the idea that natural selection acts on the final phenotypic outcome of a coordinated system of physiological, psychological and cultural processes. The important conditions affecting parental investment and fertility in modern socioeconomic contexts are then discussed. An explanation of modern fertility and parental investment behavior in terms of the interaction of those conditions with the physiological and psychological mechanisms that evolved during our hunting and gathering history is proposed. The proposal is that skills-based competitive labor markets increase the value of parental investment in children and motivate better-educated, higher income parents to invest more per child than their less-educated, lower-earning counterparts. It is also suggested that the deviation from fitness maximization associated with low modern fertility is due to excess expenditures on both parental and offspring consumption, indicating that our evolved psychology is responding to cues in the modern environment that are not directly related to the fitness impacts of consumption. © 1996 Wiley-Liss, Inc.

Risk-sharing between and within families

Abstract: This paper uses the Panel Study of Income Dynamics to test whether risk-sharing is complete between or within American families. The tests accommodate a wide variety in the configuration and availability of family data. The test results reject inter- as well as intra-family full risk-sharing even assuming that leisure is endogenous or that leisure and consumption are nonseparable.

Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh

Abstract: This paper is one of several World Bank papers examining the sustainability and household and intrahousehold impact of credit programs for the poor in Bangladesh. The aim of the paper is to develop a method for estimating the costs and benefits of group-based credit programs and to determine under what conditions group-based credit programs are sustainable. Household outcome measures include school enrollment of boys and girls the labor supply of women and men the asset holdings of women recent fertility and contraceptive use consumption and the anthropometric status of children. Findings indicate that credit to women was more likely to influence 7 out of 8 outcome behaviors than credit to men (3 out of 8). Three credit programs are evaluated: Grameen Bank the BRAC and the BRDBs RD-12. The methods include a comparison of ordinary least squares and complex econometric methods using a quasi-experimental design. The comparison served to highlight the importance of accounting for endogeneity in evaluating credit programs in order to avoid mistaken conclusions drawn from "naive" estimates. Findings indicate that credit was a significant determinant of household behavior. Credit in the Grameen Bank program had the greatest positive impact on outcomes associated with household wealth and womens status. Grameen Banks credit to women had the largest impact on girls schooling womens labor supply and total household expenditure. Grameen Banks credit to men had the largest impact on fertility. Womens credit from the BRBD had the largest impact on boys schooling and the value of womens assets. Credit did not impact on the anthropometric status of children. The effect of credit programs on contraceptive use was measured differently in the two methods. Also the "naive" method underestimated the effect on increasing total household expenditure. Policy should consider that the credit program empowered women decreased poverty and had beneficial effects from credit given to men.

What Can Explain the Apparent Lack of International Consumption Risk Sharing

Abstract: Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries.

Do Real Output and Real Wage Measures Capture Reality? The History of Lighting Suggests Not

Abstract: Historical studies of the growth in real wages and output depend upon the accurate measure of the price trends of goods and services. Over long periods of time, the consumption bundle has changed profoundly, and most of today's consumption includes items that were not produced, and in some cases not even conceived, at the beginning of the nineteenth century. This paper tackles the issue of the quantitative significance of the qualitative change in consumption by choosing a single service -- lighting -- for which the service characteristic -- illumination -- is invariant. We estimate changes in lighting efficiency and construct a "true" price index back to Babylonian times, with the major emphasis on changes over the last two centuries. A comparison of the true price of light with a traditional light price indicates that traditional price indexes overstate price growth, and therefore understate output growth, by a factor between 900 and 1,600 since the beginning of the nineteenth century. This finding suggests that the "true" growth of real wages and real output may have been significantly understated during the period since the Industrial Revolution.

Asset pricing in economies with frictions

Abstract: This paper examines how proportional transaction costs, short-sale constraints, and margin requirements affect inferences based on asset return data about intertemporal marginal rates of substitution (IMRSs). It is shown that small transaction costs can greatly reduce the required variability of IMRSs. This suggests that the low variability of many parametric, aggregate consumption based IMRSs need not be inconsistent with asset return data. Euler inequalities for a transaction cost economy with power utility are tested using aggregate consumption data and returns on stocks and short maturity U.S. Treasury bills. In the majority of cases there is little evidence against power utility specifications with low risk-aversion parameters. The results are obtained with transaction costs on stocks as small as .5% of price, and are in sharp contrast to the strong rejection of the analogous Euler equalities for a frictionless economy.

Disciplining or protecting the poor? Avoiding the social costs of peer pressure in micro‐credit schemes

Abstract: This paper utilizes case studies from Bangladesh and Sri Lanka to explore a disadvantage of group lending schemes: the unnecessary social costs of repayment pressure. The author argues that extending credit and meeting the needs of the poor need not be incompatible. The poor can be protected from socially damaging peer pressure lending practices via flexible repayment schedules, savings facilities and short-term, high-interest consumption loans. The analysis suggests protectional devices for poor borrowers, better staff performance indicators, and self-management of some resources by the poor.

The Economics of Poverty Traps Part One: Complete Markets

Abstract: This paper lists theoretical reasons why neoclassical models of one-sector growth imply that nations with identical economic structures need not converge to the same steady state or balanced growth path, and outlines the empirical significance and policy implications of conditional nonconvergence. We survey poverty traps in both convex and nonconvex economies with complete market structures. Among the potential causes of traps are subsistence consumption; distorted international trade in intermediate inputs; demographic transitions when fertility is endogenous; technological complementarities in the production of consumption goods, financial intermediation services, manufactures, or human capital; coordination failures among voters; various restrictions on borrowing; indivisibilities in human capital formation or child rearing; and monopolistic competition in product or factor markets.

Connective and Communal Public Goods in Interactive Communication Systems

Abstract: This paper extends theories of public goods to interactive communication systems. Two key public communication goods are identified. Connectivity provides point-to-point communication, and communality links members through commonly held information, such as that often found in databases. These extensions are important, we argue, because communication public goods operate differently from traditional material public goods. These differences have important implications for costs, benefits, and the realization of a critical mass of users that is necessary for realization of the good. We also explore multifunctional goods that combine various features and hybrid goods that link private goods to public ones. We examine the applicability of two key assumptions of public goods theory to interactive communication systems. First, jointness of supply specifies that consumption of a public good does not diminish its availability to others. Second, impossibility of exclusion stipulates that all members of the public have access to the good. We conclude with suggestions for further theoretical development.

Monopolistic Competition, Increasing Returns, and the Effects of Government Spending

Abstract: The dynamic effects of government spending are considered in a general equilibrium model with monopolistic competition and increasing returns. In the economy, changes in the level of government spending endogenously raise total factor productivity, even though the spending itself is entirely wasteful. This leads to several results which contrast with the effects of government spending policies in environments with constant returns. A permanent increase in government spending increases the steady-state wage and may increase steady-state consumption. Also, regardless of its persistence, a temporary shock to government spending may simultaneously raise output, investment, the real wage, and consumption. Copyright 1996 by Ohio State University Press.

Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption

Abstract: The authors study the movements in output, consumption, and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real-business-cycle models. They show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model. The authors also find that forecastable changes in the three series are strongly positively correlated with each other. On the other hand, for parameters whose implications are plausible in other respects, the model implies that output, consumption, and hours should not all be expected to move in the same direction. Copyright 1996 by American Economic Association.

Permanent Income, Current Income, and Consumption: Evidence From Two Panel Data Sets

Abstract: In this article, I estimate Euler equations—that is, the first-order conditions of the consumers' maximization problem—using data from two data sets. Consumption data are taken from the Consumer Expenditure Survey. Income data are taken from the Panel Study of Income Dynamics. Because the data for the estimation come from two samples, I use a generalization of the instrumental variables estimator—the two-sample instrumental variables estimator. I find evidence that consumption is excessively sensitive to predictable income growth. The estimates of the coefficient of excess sensitivity for three consumption measures range from .2 to .5.