Research on the comparison effect of urban residents' consumption

Abstract

As an important component of gross domestic product, expanded consumer spending is essential for promoting economic growth. To provide a realistic basis to support effective policy formulation to meet diversified consumption needs and enhance the fundamental role of consumption in economic development, this study constructs a multi-layer panel extended linear expenditure system (ELES) model that includes external habit formation (comparison effect). The study empirically analyses the comparison effect and causes using nested consumption data of urban residents from 31 provinces in China from 2002 to 2019. The results show that the comparison effect is relatively large for urban residents’ subsistence consumption expenditure. In contrast, the comparison effect in development and enjoyment consumption expenditure is smaller overall. Second, a widening income gap increases food and clothing comparison effects. Increased educational attainment reduces comparison effects on housing, health care and transport. Significant geographical differences in the comparison effect on various types of consumer spending are evident based on the degree of regional economic development. Finally, the study proposes policy recommendations of increasing residents’ income, raising educational levels and promoting balanced regional development. The most significant contribution of this study is the innovative multi-layer panel ELES statistical model which incorporates external habit formation theory to systematically analyse comparison effects and causes.