Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities

Jessie Handbury

No 26574, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F11 L81 R11 R22 R32 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ure
Note: ITI
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