Envy and Habits: Panel Data Estimates of Interdependent Preferences

Abstract

We estimate the importance of preference interdependence from consumption choices. Our strategy follows the literature that tests the constraints imposed by optimality in the evolution of individual consumption. We derive an Euler equation from a preference specification that allows for nonseparabilities across households and across time. The introduction of habits and envy places additional restrictions on the evolution of the optimal consumption path. We use a unique data set that follows a sample of 3,200 households for up to eight consecutive quarters to test these restrictions. Our estimates suggest that, if one defines utility over consumption services, a large fraction of these services is relative, with one fourth of the weight placed in the consumption of the reference group and more than one third of the weight placed on the agent's past consumption.

“Relative concerns for consumption at the top”: An intertemporal analysis for the UK

“…The R 2 of all estimations is around 0.10, indicating that a non-negligible fraction of the variance of observed consumption growth in our sample can be explained by the included controls. Unfortunately, we cannot compare this figure to other studies estimating log-linearised Euler equations, such as Dynan (2000) or Alvarez-Cuadrado et al (2012), since these studies do not report the R 2 .…”

“…The first one postulates that individuals compare themselves to other individuals living in the same geographical area (Blanchflower and Oswald, 2004;Luttmer, 2005;Ravina, 2007;Alvarez-Cuadrado et al, 2012). The second approach assumes that individuals compare themselves primarily to other individuals sharing certain demographic characteristics such as age, gender, education or profession (Alessie and Kapteyn, 1991;Maurer and Meier, 2008;Lewbel et al, 2013).…”

“…We adopt a version of the function suggested in Abel (1990) and widely used in the literature ever since (Dynan, 2000;Ravina, 2007;Alvarez-Cuadrado et al, 2012). Specifically, we assume that the household exhibits constant relative risk aversion (CRRA) -consistent with the available empirical evidence (Chiappori and Paiella, 2011)-and its preferences can be described through the isoelastic intra-period sub-utility function:…”

“…Using a Californian data set on credit card purchases, she estimates that an increase in the growth of city-level consumption by 1 percentage point increases own consumption growth by 0.2 percentage points. Alvarez-Cuadrado et al (2012) use data from the Spanish Household Budget Continuous Survey (ECPF) to estimate an Euler equation that incorporates relative concerns. They provide evidence for an effect of the consumption growth of neighbouring households on own consumption growth in a similar range.…”

International Capital Markets with Time-Varying Preferences

“…The empirical evidence in favor of interdependent consumption dates back to Pollak and Wales (1978) and since then has been growing continuously until the recent works of Alvarez-Cuadrado et al (2016) andDe Giorgi et al (2017). Scholars have shown that evidence of interdependent choices can be found in aggregate consumption expenditures, many consumption categories, investment strategies and is robust across different countries.…”