Working Paper: NBER ID: w4795
Authors: Orazio P. Attanasio; Guglielmo Weber
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.
Keywords: Consumption; Intertemporal Optimization; Consumer Expenditure Survey
JEL Codes: D12; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic changes (J11) | consumption behavior (D10) |
| labor supply (J20) | consumption behavior (D10) |
| proper aggregation (C43) | estimates of behavioral parameters (C51) |
| estimates of behavioral parameters (C51) | elasticity of intertemporal substitution (D15) |
| incorrect aggregation methods (C43) | misinterpretation of data (Y10) |
| neglecting nonlinearities (C20) | incorrect conclusions about consumer behavior (D19) |