Behavioral Heterogeneity and the Income Effect

Laurent Calvet and Etienne Comon
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Etienne Comon: Harvard University

The Review of Economics and Statistics, 2003, vol. 85, issue 3, 653-669

Abstract: Inspired by the recent literature on aggregation theory, this paper introduces HITS, a semiparametric model of consumer demand that allows for diversity in tastes. The strong variation of budget shares observed across income groups has two possible origins: the individual income effect, and taste differences between poor and rich households. Consumer surveys reporting repeated cross sections do not permit the direct measurement of these two effects. In HITS, linear heterogeneity allows the GMM estimation of structural coefficients on an aggregate series. The joint density of spending and tastes is then recovered from cross sections by a nonparametric procedure involving a deconvolution. We estimate the model on British data (1968-1998) and report that taste heterogeneity explains a large fraction of the variation of budget shares with income. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2003
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Working Paper: Behavioral Heterogeneity and the Income Effect (2003)
Working Paper: Behavioral Heterogeneity and The Income Effect (2000)
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