Working Paper: NBER ID: w26574
Authors: Jessie Handbury
Abstract: This paper shows that the products and prices offered in markets are correlated with local income-specific tastes. To quantify the welfare impact of this variation, I calculate local price indexes micro-founded by a model of non-homothetic demand over thousands of grocery products. These indexes reveal large differences in how wealthy and poor households perceive the choice sets available in wealthy and poor cities. Relative to low-income households, high-income households enjoy 40 percent higher utility per dollar expenditure in wealthy cities, relative to poor cities. Similar patterns are observed across stores in different neighborhoods. Most of this variation is explained by differences in the product assortment offered, rather than the relative prices charged, by chains that operate in different markets.
Keywords: Cost of living; Nonhomothetic preferences; Consumer welfare; Spatial price indexes
JEL Codes: F11; R11; R22; R32; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local income levels (H79) | availability of grocery products (L81) |
| local income levels (H79) | pricing of grocery products (L11) |
| high-income consumers (D12) | utility per dollar spent (L97) |
| availability of higher quality products (L15) | perceived lower grocery costs (D19) |
| cross-city variation in product variety (L15) | differences in grocery costs (D19) |
| income-specific tastes (D11) | varying perceptions of cost of living (E30) |