Role of Wealth in Consumption: An Empirical Investigation

Abstract

THE primary purpose of this work is to conduct an empirical investigation concerning the role of in consumption, and to test a few postulates of the wealth theories of consumption. The opportunity for such an investigation is provided by the recent publication by Kendrick (1976) of annual data on human and nonhuihan for the United States for the period 1929-69. Specifically, the paper (a) provides estimates of a consumption function in which a variable is included in addition to the income variable; (b) compares the responses of consumption expenditures to changes in human and nonhuman and tests empirically Friedman's hypothesis (1957, p. 17) regarding the effect on consumption of an increase in nonhuman relative to total wealth; and (c) throws some light on the stock adjustment' and habit persistence' postulates by reporting estimates for equations in which a lagged consumption term is added to the variables. The organization of the paper follows the aspects stated above. After a discussion of some methodological questions, we provide estimates of the parameters of consumption functions that include as a distinct variable in addition to income, and show that the variable has significant coefficients, and the coefficients look plausible. The income variable coefficients are substantial, and while being consistent with the life cycle' hypothesis are not necessarily inconsistent with Friedman's theory. Next, we discuss the separate effects of human and nonhuman on consumption. The evidence seems to favor Friedman's postulate that an increase in nonhuman wealth, relative to the total, increases consumption. Estimation of separate equations for (a) durable goods and (b) nondurables and services, by including a lagged consumption term in addition to the variables, suggests that the coefficient pattern can be interpreted as indicative of a stronger habit formation' effect for nondurables and services than for durables. A summarizing section concludes the paper.