Money pump and the gas pump: Revealed preference violations in nonenergy consumption and gasoline prices

Shane Wood
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Shane Wood: Bank of Canada

Canadian Stata Users' Group Meetings 2017 from Stata Users Group

Abstract: Using 11 years of monthly scanner consumption data for a panel of U.S. households in two municipalities, we document that households shift their consumption basket in response to gasoline prices and that these shifts are associated with exploitable revealed preference violations. Following Echinque, Lee, and Shum (2011) and Cherchye, De Rock, Schmeulders, and Spieksma (2012), we construct a money pump cost of the household's violation of the axiom of revealed preference. The money pump cost is the dollar value that could be extracted from the household from its revealed preference violations by a seller. We show that the money pump costs are affected by gasoline prices, household search effort (as proxied by the number of shopping trips) and by environmental health factors. We find that a $1.00 increase in the price per gallon of gasoline increases the average amount that could be exploited from a household by $0.85 - $3.27 from a basket of goods worth $50.00. Quantile regressions reveal that some households may be affected nearly twice as much. The results indicate that gasoline prices may have heterogeneous wealth and welfare effects.

Date: 2017-09-20
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Persistent link: https://EconPapers.repec.org/RePEc:boc:csug17:10

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