Consumer Theory with Non-Parametric Taste Uncertainty and Individual Heterogeneity

Christopher Dobronyi and Christian Gouri\'eroux

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Abstract: We introduce two models of non-parametric random utility for demand systems: the stochastic absolute risk aversion (SARA) model, and the stochastic safety-first (SSF) model. In each model, individual-level heterogeneity is characterized by a distribution $\pi\in\Pi$ of taste parameters, and heterogeneity across consumers is introduced using a distribution $F$ over the distributions in $\Pi$. Demand is non-separable and heterogeneity is infinite-dimensional. Both models admit corner solutions. We consider two frameworks for estimation: a Bayesian framework in which $F$ is known, and a hyperparametric (or empirical Bayesian) framework in which $F$ is a member of a known parametric family. Our methods are illustrated by an application to a large U.S. panel of scanner data on alcohol consumption.

Date: 2020-10, Revised 2021-01
New Economics Papers: this item is included in nep-ecm, nep-ore and nep-upt
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