Showing papers on "Consumption (economics) published in 2001"

Estimating Wealth Effects Without Expenditure Data—Or Tears: An Application to Educational Enrollments in States of India

Abstract: This paper has an empirical and overtly methodological goal. The authors propose and defend a method for estimating the effect of household economic status on educational outcomes without direct survey information on income or expenditures. They construct an index based on indicators of household assets, solving the vexing problem of choosing the appropriate weights by allowing them to be determined by the statistical procedure of principal components. While the data for India cannot be used to compare alternative approaches they use data from Indonesia, Nepal, and Pakistan which have both expenditures and asset variables for the same households. With these data the authors show that not only is there a correspondence between a classification of households based on the asset index and consumption expenditures but also that the evidence is consistent with the asset index being a better proxy for predicting enrollments--apparently less subject to measurement error for this purpose--than consumption expenditures. The relationship between household wealth and educational enrollment of children can be estimated without expenditure data. A method for doing so - which uses an index based on household asset ownership indicators- is proposed and defended in this paper. In India, children from the wealthiest households are over 30 percentage points more likely to be in school than those from the poorest households.

Consumption, Aggregate Wealth, and Expected Stock Returns

Abstract: This paper studies the role of f luctuations in the aggregate consumption‐wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these f luctuations in the consumption‐wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption‐wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption‐aggregate wealth ~human capital plus asset holdings! ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents’ expectations of future returns on the market portfolio. UNDERSTANDING THE EMPIRICAL LINKAGES between macroeconomic variables and financial markets has long been a goal of financial economics. One reason

Prospect Theory and Asset Prices

Abstract: We study asset prices in an economy where investors derive direct utility not only from consumption but also from fluctuations in the value of their financial wealth. They are loss averse over these fluctuations, and the degree of loss aversion depends on their prior investment performance. We find that our framework can help explain the high mean, excess volatility, and predictability of stock returns, as well as their low correlation with consumption growth. The design of our model is influenced by prospect theory and by experimental evidence on how prior outcomes affect risky choice.

Growth is Good for the Poor

Abstract: When average income rises, the average incomes of the poorest fifth of society rise proportionately. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. The authors document this empirical regularity in a sample of 92 countries spanning the past four decades and show that it holds across regions, periods, income levels, and growth rates. The authors next ask whether the factors that explain cross-country differences in the growth rates of average incomes have differential effects on the poorest fifth of society. They find that several determinants of growth--such as good rule of law, opennness to international trade, and developed financial markets--have little systematic effect on the share of income that accrues to the bottom quintile. Consequently, these factors benefit the poorest fifth of society as much as everyone else. Thee is some weak evidence that stabilization from high inflation and reductions in the overall size of government not only increase growth but also increase the income share of the poorest fifth in society. Finally, the authors examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that relatively little is known about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society.

The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence*

Abstract: This Paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data we find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. We compare these findings to several variations of a standard real business cycle model and we find that the positive correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

Comparing Wealth Effects: The Stock Market versus The Housing Market

Abstract: We examine the link between increases in housing wealth, financial wealth, and consumer spending. We rely upon a panel of 14 countries observed annually for various periods during the past 25 years and a panel of U.S. states observed quarterly during the 1980s and 1990s. We impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regressions relating consumption to income and wealth measures, finding a statistically significant and rather large effect of housing wealth upon household consumption.

The perceived service quality concept – a mistake?

Abstract: Compares traditional marketing models to service marketing models, stating that the most important characteristic of services is the fact that services are processes, not things. A service firm has no products, only interactive processes. Whereas the consumption of physical products can be described as “outcome consumption”, the consumption of services can be characterized as “process consumption”. In this context, describes the development of the perceived service quality concept.

The relationship between energy consumption and economic growth in pakistan

Abstract: This paper investigates the causal relationship between energy consumption and economic growth and energy consumption and employment in Pakistan. By applying techniques of co-integration and Hsiao’s version of Granger causality, the results infer that economic growth causes total energy consumption. Economic growth also leads to growth in petroleum consumption, while on the other hand, neither economic growth nor gas consumption affect each other. However, in the power sector it has been found that electricity consumption leads to economic growth without feedback. The implications of the study are that energy conservation policy regarding petroleum consumption would not lead to any side-effects on economic growth in Pakistan. However, an energy growth policy in the case of gas and electricity consumption should be adopted in such a way that it stimulates growth in the economy and thus expands employment opportunities. The relationship between energy consumption and economic growth is now well established in the literature, yet the direction of causation of this relationship remains controversial. That is, whether economic growth leads to energy consumption or that energy consumption is the engine of economic growth. The direction of causality has significant policy implications. Empirically it has been tried to find the direction of causality between energy consumption and economic activities for the developing as well as for the developed countries employing the Granger or Sims techniques. However, results are mixed. The seminal paper by Kraft and Kraft (1978), supported the unidirectional causality from GNP growth to energy consumption in the case of the United States of America for the period 1947-1974. Erol, and Yu, (1987), tested data for six industrialized countries, and found no significant causal relationship between energy consumption and GDP growth and, energy and employment. Yu, et. al. (1988), found no relationship between energy and GNP, and

The Life-Cycle Model of Consumption and Saving

Abstract: A central implication of life-cycle models is that agents smooth consumption We review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime We find that life-cycle models--particular those which incorporate realistic features of markets and goods--have more empirical successes than failures We also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents Finally, we emphasize that the coherence of life-cycle models imposes an important discipline when incorporating new features into models

What Accounts for the Variation in Retirement Wealth Among U.S. Households

Abstract: Even among households with similar socioeconomic characteristics, saving and wealth vary considerably. Life-cycle models attribute this variation to differences in time preference rates, risk tolerance, exposure to uncertainty, relative tastes for work and leisure at advanced ages, and income replacement rates. These factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile. Using the Panel Study of Income Dynamics and the Consumer Expenditure Survey, we find little support for these implications. The data are instead consistent with "rule of thumb," "mental accounting," or hyperbolic discounting theories of wealth accumulation. (JEL DI, D91, E21)

Comparing Wealth Effects: The Stock Market Versus the Housing Market

Abstract: We examine the link between increases in housing wealth, financial wealth, and consumer spending. We rely upon a panel of 14 countries observed annually for various periods during the past 25 years and a panel of U.S. states observed quarterly during the 1980s and 1990s. We impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regressions relating consumption to income and wealth measures, finding a statistically significant and rather large effect of housing wealth upon household consumption.

The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence

Abstract: This Paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data we find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. We compare these findings to several variations of a standard real business cycle model and we find that the positive correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

The Earned Income Tax Credit

Abstract: Since its inception in 1975, the Earned Income Tax Credit (EITC) has grown into the largest, Federally-funded means-tested cash assistance program in the United States. In this chapter, we review the political history of the EITC, its rules and goals and provide a broad set of program statistics on its growth and coverage. We summarize conceptual underpinnings of much of the recent economic research on the EITC, discussing participation in the credit and compliance with its provisions, and its effects on labor force participation and hours of work, marriage and fertility, skill formation and consumption. We note that participation rates of the credit are high, rates of credit noncompliance are also high, and that there are theoretical reasons to prefer the EITC to other anti-poverty programs if one's objective is to encourage work among the poor. We also note that the predicted effects of the EITC are not all pro-work, especially with respect to hours and its labor market incentives for two-earner couples. We then summarize the existing empirical research on the behavioral effects of the EITC, paying particularly emphasis to the effects of the 1986, 1990 and 1993 expansions of the credit on labor force participation and hours of work. The literature provides consistent evidence, generated from a variety of empirical approaches, that the EITC positively affects labor force participation. The literature also finds smaller, negative effects on hours of work for people already in the labor market and for secondary workers. We conclude the chapter with a discussion of the ongoing EITC-related policy debates and highlight what, if any, critical economic issues underlie these debates.

Sugar consumption and caries risk: a systematic review.

Abstract: This systematic review addresses the question: In the modern age of extensive fluoride exposure, do individuals with a high level of sugar intake experience greater caries severity relative to those with a lower level of intake? The MEDLINE and EMBASE databases were searched for English-language papers published between 1980 and 2000 using a search expression developed in conjunction with an experienced librarian. There were 809 papers located in the initial search. A review of titles and abstracts to identify clearly irrelevant papers reduced this number to 134. Two readers each read one half of these papers, and application of predetermined inclusion/exclusion criteria reduced this number of papers to sixty-nine. Criteria were established for scoring the quality of each of these papers on evidence tables. The maximum score for each paper was 100; the sixty-nine papers rated scored between 12 and 79. Final judgment of results was limited to those thirty-six papers that scored 55 or higher on the evidence tables and that reported studies carried out in countries where there is moderate-to-extensive fluoride exposure. Results showed that only two papers found a strong relationship between sugar consumption and caries development, sixteen found a moderate relationship, and eighteen found weak-to-no relationship. It was concluded that the relationship between sugar consumption and caries is much weaker in the modern age of fluoride exposure than it used to be. Controlling the consumption of sugar remains a justifiable part of caries prevention, however, if not always the most important aspect.

Estimating the effect of unearned income on labor supply, earnings, savings and consumption: Evidence from a survey of lottery players

Abstract: This paper provides empirical evidence about the effect of unearned income on earnings. consumption, and savings. Using an original survey of people playing the lottery in Massachusetts in the mid-1980's, the effects of the magnitude of lottery prizes on economic behavior are analyzed. The critical assumption is that among lottery winners the magnitude of the prize is randomly assigned. It is found that unearned income reduces labor earnings, with a marginal propensity to consume leisure of approximately 11 percent, with larger effects for individuals between 55 and 65 years old. After receiving about half their prize, individuals saved about 16 percent.

Advertising and aggregate consumption: an analysis of causality

Abstract: This paper is concerned with testing for causation, using the Granger definition, in a bivariate time-series context. It is argued that a sound and natural approach to such tests must rely primarily on the out-of-sample forecasting performance of models relating the original (non-prewhitened) series of interest. A specific technique of this sort is presented and employed to investigate the relation between aggregate advertising and aggregate consumption spending. The null hypothesis that advertising does not cause consumption cannot be rejected, but some evidence suggesting that consumption may cause advertising is presented.

The response of expenditures to anticipated income changes : panel data estimates

Abstract: Standard models of intertemporal allocation predict that the time path of expenditures should be independent of the time path of income. Recently two papers, Parker (1999) and Souleles (1999) have suggested that U.S. households have a high marginal propensity to spend within year anticipated income changes. We use an expenditure survey panel from Spain to re-examine this issue. We exploit two important features of the Spanish data. First, we have quarterly panel data that follows households for more than four quarters. Second, we use the fact that workers are exogenously sorted into one of two payment schemes: some receive the same amount each month of the year and others receive an extra payment in June and December. The extra payment is large and predictable. We examine the detailed pattern of expenditures over the year to see whether they differ between the two groups. We fail to find even weak differences. We complement this with a conventional Euler equation analysis of excess sensitivity. Our predicting equation for (quarterly) earnings growth is much better than usual and is likely to give a powerful test of the hypothesis that predictable changes in income do not lead to changes in expenditure patterns. The results of this analysis confirm the graphical analysis: we find no evidence of excess sensitivity. We conclude that households in normal times do smooth consumption over the year. We suggest a reconciliation of our results with those of Parker and Souleles.

Saints and Markets: Activists and the Supply of Credence Goods

Abstract: This paper contains a theoretical exploration of the potential effects of an information-supplying activist on a market for credence goods. Using a non-cooperative game-theoretic model with incomplete information, we find that such an activist can alter the decisions of firms and consumers and enhance the social welfare of market exchange. We also find that an activist can support equilibria in which firms differentiate their products on some credence characteristic even though this characteristic remains unknown to the consumer both prior and subsequent to consumption. In general, our analysis has several implications for the study of private collective action in markets.

A Cournot-Nash Model of Family Decision Making

Abstract: This paper develops a model of two person family. Each family member attempts to maximize his or her own utility. Yet they are interdependent in two respects. Family members are interdependent, first of all, because they care about each other. Second, there are local public goods or household expenditures within the family, such as housing. The presence of household expenditures means that one family member's consumption choices affect the other family member's level of well-being. The two family members' interdependent utility maximization problems are first solved using a non-cooperative, or Cournot-Nash, game theoretic framework then the model is extended to take the Cournot-Nash equilibrium as a threat point in a bargaining game. The model's predictions differ substantially from the "unitary" framework usually used in economic analysis, in which households maximize a single household utility function. When the spouses are relatively equal in income, or when one spouse is much wealthier than the other and the wealthier spouse has all the bargaining power in the family, the equilibrium depends, as in the unitary model, on household income but not on the division of income between spouses. In the intermediate case between equality and substantial inequality or in the case where one spouse is much wealthier than the other but the wealthier spouse does not have all the bargaining power, the distribution of income does shape expenditure patterns, contrary to the predictions of the unitary model. The contribution of the paper is to provide a rigorous derivation of the properties of household demands in the Cournot-Nash setting, a full analysis of the determinants of intra-household resource allocation, including the effect of varying household bargaining power, and an explication of the model’s implications for policy analysis.

The Economics of Consumer Knowledge

Abstract: While approaches to measuring the state of a consumer's knowledge are well developed, much less is known about the relationship between knowledge and consumer choice and information search. The purpose of this article is to explore these relationships by treating consumer knowledge as human capital, which affects the full price of consumption and search activities. Using this framework, models are presented to explain life cycle consumption patterns, lifestyles, brand loyalty, choice of features, and search behavior. This economic perspective is compared and contrasted to other consumer research on these topics, including recent qualitative research that examines consumption behavior.

Learning to consume - A theory of wants and the growth of demand

Abstract: The theory of economic growth takes little notice of what is happening on the demand side of the markets so that ever more goods and services can be sold. In order to make progress, this paper revives a classical notion in economics, the concept of wants, and re-casts it in terms of a behavioral theory. Hypotheses are discussed concerning the wants people pursue, the changes in these wants, and the corresponding consumption knowledge. The implications derived focus on why, in spite of the historically unique growth of per capita income in the modern economies, consumption has not been altogether satiated. In the suggested explanation, increasing variety of consumption items offered in the markets and increasing specialization of the consumers in their demand activities play a key role.

special issue: Learning to consume - A theory of wants and the growth of demand

Abstract: The theory of economic growth takes little notice of what is happening on the demand side of the markets so that ever more goods and services can be sold. In order to make progress, this paper revives a classical notion in economics, the concept of wants, and re-casts it in terms of a behavioral theory. Hypotheses are discussed concerning the wants people pursue, the changes in these wants, and the corresponding consumption knowledge. The implications derived focus on why, in spite of the historically unique growth of per capita income in the modern economies, consumption has not been altogether satiated. In the suggested explanation, increasing variety of consumption items offered in the markets and increasing specialization of the consumers in their demand activities play a key role.

A Primer on the Economics and Time Series Econometrics of Wealth Effects

Abstract: This paper reviews the statistical approach typically applied by macroeconomi sts to investigate the empirical link between aggregate data on household consumption, income, and wealth. In particular, we focus on studies determining whether and how much changes in net worth, such as those generated by the stock-market boom in the U.S. over the latter 1990s, are responsible for subsequent sw ings in the growth rate of consumer spending. We show how simple economic theory is used to motivate an econometric strategy that consists of two stages of analysis. First, regress ions are used to identify trend mov ements shared by consumption, income, and wealth over the long run, then deviations of these series from their common long-run trends are used to help forecast consumption growth over the short run. Our discussion highlights the various judgments that researchers must make in the course of impl ementing this empirical approach, and we detail how specific parameter estimates describing the magnitude of the wealth effect on consumption--and even broad conclusions about its existence --are affected by making alternative choices.

GARP for Kids: On the Development of Rational Choice Behavior

Abstract: In this paper we examine the extent to which consumption choices by 7 and 11-year-old children and college undergraduates satisfy the axioms of revealed preference. We find that choices by even the 7-year-olds are considerably more likely to obey revealed preference axioms than would be true if they were choosing randomly. 11-year-olds do better still, while college students do no better than 11-year-old children. We also find that mathematical ability is not correlated with choosing rationally. We argue that this evidence suggests that the ability to choose rationally is not innate, but that it does develop quickly.

Consumer Self-Monitoring, Materialism and Involvement in Fashion Clothing:

Abstract: This study examines the relationships between gender, age, self-monitoring, materialism, fashion clothing consumption motives and fashion clothing involvement. The study initially builds on the wor...

Measuring the Welfare Effects of Nutrition Information

Abstract: Cost/benefit analysis justifies regulations altering the amount of health-related information presented to consumers. The current method of benefit analysis, the cost of avoided illness, is limited; it assumes the benefits of health-related information are adequately represented by changes in illnesses. The manuscript develops a benefit estimation method to measure the welfare impacts of providing nutrient information. Nutrient labeling significantly affects purchase behaviour but may not lead to increased consumption of health foods. Nutrient labeling may increase welfare without any change in health risk. Thus, the cost of avoided illness approach can underestimate the social benefits of providing nutrient information. Copyright 2001, Oxford University Press.