Consumption Bundle Research Articles

Fuel is Pumping Premiums: A Consumption-Based Explanation of the Value Anomaly

Standard applications of the consumption-based asset pricing model make the assumption that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurable goods or services. As a consequence, energy consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in energy consumption betas explains a large part of the value premium. Value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the oil supply shocks that also affect households.

Life‐Cycle Expenditure and Retirees’ Cost of Living

AbstractThe aim of this paper is twofold. First, we document the expenditure life‐cycle profile in the United Kingdom and show how differences in the consumption bundle of retirees and workers translate into different inflation experiences. Albeit different in given years, the inflation experienced by the two groups is not significantly different over a long time period. We also show how the distribution of household inflation evolved over time, with particular emphasis on the period around the latest financial crisis. Second, we estimate an Exact Affine Stone Index (EASI) demand system and compute the change in the cost of living and the substitution effect for both retirees and workers for the period 1990–2014. Finally, we show how pension income would evolve during that period under three alternative indexation measures for different cohorts of retirees. The indexation measure that results in the highest pension income depends on the time of retirement.

Rebound effect of transportation considering additional capital costs and input-output relationships: The role of subsistence consumption and unmet demand

The anticipated carbon mitigation through energy-saving technology progress might be partially or even totally offset due to rebound effect. A better understanding of rebound effect, especially the underling mechanisms, has important implications for energy efficiency policies to achieve the goal of sustainability. Previous studies usually ignore additional capital costs for adopting energy-efficient equipment and indirect carbon emissions for providing new consumption bundles. Also, the precise mechanisms of how living standard affects rebound effect are unknown. Using almost ideal demand system (AIDS) model and input-output relationships among sectors, this paper builds a method to estimate the rebound effect that allows for additional capital costs and carbon emission changes of all other goods and services due to backward-forward linkages. We find that rebound effect is over 100% for transportation in rural China even though additional capital costs would indeed reduce the magnitude, and the results are quite robust to alternative settings. As for the mechanisms, rebound effect is divided into substitution and income channels by Slutsky decomposition. Here we show that both of these two channels are dependent on living standard because of subsistence consumption and unmet demand. Carbon emissions of poor households will rebound more through income channel of unmet demand, while rich households usually do not restricted by subsistence consumption, and thus through substitution channel, rebound of carbon emissions would be larger for rich households. The opposite directions of mechanisms dig more information about the nonlinearity of rebound effect to income levels. Furthermore, given the estimating results, this paper gains several insights in terms of welfare benefits, rather than just focuses on carbon reduction.

Welfare evaluations and price indices with path dependency problems

In cases where multiple prices change, this paper develops methods for calculating compensating and equivalent variations from the prices, the consumption bundle, and the wealth elasticities of demand for goods. The methods are a natural extension and generalization of the method in Willig (Am Econ Rev 66(4):589–597, 1976), and have the ability to provide second-order approximations of compensating and equivalent variations. In addition, this paper considers two types of price paths: indifference price paths, along which utility levels are kept constant, and iso-price-ratio paths, along which prices change proportionally. Along these two paths, changes in consumer surplus, compensating variation, and equivalent variation are easily calculated, and that there are interesting and precise relationships among them. Furthermore, the methods and relationships above correspond to those of the Laspeyres–Konus and Paasche–Konus true cost of living price indices and the Divisia indices.

The advent of the sharing culture and its effect on product pricing

Empirical observations suggest that consumers’ propensity towards sharing varies with culture and the individuals’ socio-demographic characteristics. In an economy with overlapping generations of heterogeneous consumers, we study optimal dynamic selling by a durable-goods monopolist in equilibrium. Feasible dynamic pricing strategies include second-degree price discrimination offering intertemporal consumption bundles in the form of rental and/or purchase options. We find that as the population’s peer-trade propensity increases, possibly due to a cultural shift from private ownership to collective consumption, the durable-goods monopolist’s optimal strategy shifts from unbundling (offering exclusively rentals), via mixed bundling (offering the options of rental and purchase side-by-side), to pure bundling (offering purchase only). We show that an increase in peer-trade propensity has an ambiguous effect on the firm’s profit. Cultural shifts from low to high peer-trade propensity may be delayed by a firm’s attempts to artificially disable sharing markets by offering overly low rental rates. However, beyond a certain threshold of peer-trade propensity, the firm prefers a cultural transition to an access-based economy. The underlying reason is that the asset base of a sharing economy ultimately depends on the firm’s output, so that a portion of the anticipated rents from sharing can be captured by the durable-goods monopolist.

Pro-Rich Inflation in Europe: Implications for the Measurement of Inequality

This paper studies the distributional consequences of a systematic variation in expenditure shares and prices. Using European Union Household Budget Surveys and Harmonized Index of Consumer Prices data, we construct household-specific price indices and reveal the existence of a pro-rich inflation in Europe. Particularly, over the period 2001-15, the consumption bundles of the poorest deciles in 25 European countries have, on average, become 10.5 percentage points more expensive than those of the richest decile. We find that ignoring the differential inflation across the distribution underestimates the change in the Gini (based on consumption expenditure) by up to 0.03 points. Cross-country heterogeneity in this change is large enough to alter the inequality ranking of numerous countries. The average inflation effect we detect is almost as large as the change in the standard Gini measure over the period of interest.

Computation of Fisher–Gale Equilibrium by Auction

We study the Fisher model of a competitive market from the algorithmic perspective. For that, the related convex optimization problem due to Gale and Eisenberg (Ann Math Stat 30(1):165–168, 1959) is used. The latter problem is known to yield a Fisher equilibrium under some structural assumptions on consumers’ utilities, e.g., homogeneity of degree 1, homotheticity. Our goal is to examine applicability of the convex optimization framework by departing from these traditional assumptions. We just assume the concavity of consumers’ utility functions. For this case, we suggest a novel concept of Fisher–Gale equilibrium by using consumers’ utility prices. The prices of utility transfer the utility of consumption bundle to a common numéraire. We develop a subgradient-type algorithm from Convex Analysis to compute a Fisher–Gale equilibrium via Gale’s approach. In order to decentralize prices, we additionally implement the auction design, i.e., consumers settle and update their individual prices and producers sell at the highest offer price. Our price adjustment is based on a tatonnement procedure, i.e., the prices change proportionally to consumers’ individual excess supplies. Historical averages of consumption are shown to clear the market of goods. Our algorithm is justified by a global rate of convergence. In the worst case, the number of price updates needed to achieve an varepsilon -tolerance is proportional to frac{1}{varepsilon ^2}.

Intertemporal Choice with Continuity Constraints

We consider a model of intertemporal choice where time is a continuum, the set of instantaneous outcomes (e.g. consumption bundles) is a topological space, and where intertemporal plans (e.g. consumption streams) must be continuous functions of time. We assume the agent can form preferences over plans defined on open time intervals. We axiomatically characterize the intertemporal preferences that admit a representation via discounted utility integrals. In this representation, the utility function is continuous and unique up to positive affine transformations, and the discount structure is represented by a unique Riemann-Stieltjes integral plus a unique linear functional measuring the long-run asymptotic utility.

Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy

This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

Pro-Rich Inflation in Europe: Implications for the Measurement of Inequality

This paper studies the distributional consequences of a systematic variation in expenditure shares and prices. Using European Union Household Budget Surveys and Harmonized Index of Consumer Prices data, we construct household-specific price indices and reveal the existence of a pro-rich inflation in Europe. Particularly, over the period 2001-15, the consumption bundles of the poorest deciles in 25 European countries have, on average, become 10.5 percentage points more expensive than those of the richest decile. We find that ignoring the differential inflation across the distribution underestimates the change in the Gini (based on consumption expenditure) by up to 0.03 points. Cross-country heterogeneity in this change is large enough to alter the inequality ranking of numerous countries. The average inflation effect we detect is almost as large as the change in the standard Gini measure over the period of interest.

The Role of Correlated Investment-Skill Shocks in Business Cycles

In this paper, I study the effects of an exogenous investment shock that is correlated with the skill distribution in the population. In the model, agents, who have heterogeneous productivities, are sorted into different occupations based on their comparative advantages over the business cycle. I also assume that each occupation is associated with a different consumption bundle. This latter assumption implies that as agents switch between low and high-skill jobs their consumption behavior changes in a discrete fashion as well, which in turn gives rise to non-linear income expansion paths at the aggregate level without assuming non-homothetic preferences at the individual level. In this environment, I show that after a positive investment shock, the fraction of agents working in the goods sector increases on impact and those who start working in the goods sector replace their service intensive consumption baskets with goods intensive ones, and therefore the demand for goods increases more relative to the services along the expansion, which in return results in even more agents being hired in the goods sector. I show quantitatively that this endogenous mechanism alone can generate sizable amplification and persistence, even without labor-leisure choice, in contrast to the standard models. The model also suggests an alternative resolution to what is known as the productivity puzzle in the literature. This is because the one-to-one link between output and productivity does not exist in the model, in contrast to the standard models. Instead, the productivity is determined by the aggregate skill distribution and how agents are sorted between two sectors over the business cycle.

Inflation at the household level

We use scanner data to estimate inflation rates at the household level. Households’ inflation rates have an annual interquartile range of 6.2–9.0 percentage points. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods. Lower-income households experience higher inflation, but most cross-sectional variation is uncorrelated with observables. Households’ deviations from aggregate inflation exhibit only slightly negative serial correlation. Almost all variability in a household’s inflation rate comes from variability in household-level prices relative to average prices, not from variability in aggregate inflation.

Turkish Households Consumption Behavior and Flexible Engel Curves

The aim of this study is to first determine the relationship between the social and economic differences of households and the functional form of their consumption and then test their consumption behavior empirically. To do so, this paper utilizes the empirical framework of “Exact Affine Stone Index” (EASI), which is offered in Lewbel and Pendakur (2009), by using the Household Budget Survey data provided by Turkey Statistical Institute, for the 2003-2011 period. The analysis presented here estimates Engel curves, income and demand elasticities for eleven main consumption bundles of the reference household using the Iterative Three Stage Least Squares (I3SLS) method. Differently to previous studies, the empirical results show that the Engel curves have fifth degree polynomial functional form for all consumption groups, except for hotel expenditures for Turkish households. Moreover, this study is capable of measuring the impacts of changes in taste and preferences of Turkish households on their consumption expenditures over the years.

The government wage bill and private activity

We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. We find that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private sector employment. Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce significant contractionary effects. In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity.

Empirical Evidence of Risk Penalties for NTI Drugs

Drug innovations can outpace regulatory drug approval processes designed to control risk, creating heterogeneous risks among approved drugs. This paper estimates a price model for risky narrow therapeutic index (NTI) drugs. The traditional generic approval process has been criticized as insufficient to guarantee therapeutic equivalence in NTI drugs, leading to higher risks of toxicity or ineffectiveness when a patient switches from a brand version of an NTI to a generic version, or between generic versions. Using data from the Medical Expenditure Panel Survey, this paper finds evidence of a significant price penalty for NTI drugs. The paper also finds a smaller gap between brand-name and generic prices for NTI drugs than for non-NTI drugs, consistent with costly switching. An analysis of drug consumption bundles also supports this theory. These results show that despite the many information asymmetries and agency issues in the pharmaceutical market, there is evidence of sensitivity to risk in price and consumption behavior.

Trade in occupational safety and health: Tracing the embodied human and economic harm in labour along the global supply chain

Over the past years there has been enormous concern about labour conditions in developing countries particularly around work for the export market. This study addresses human rights issues related to Occupational Safety and Health for people suffering injuries from work demanded as a result of international trade arrangements. Here we present Occupational Safety and Health Footprints, which include the number of work-related accidents that occur throughout the world and that are directly and indirectly linked to the consumption of products, calculated for every nation's consumption bundle. OSHF include fatal footprints, non-fatal footprints, days lost footprints and wages lost footprints per given year. In order to calculate the OSHF, we used a comprehensive Multi-Regional Input Output MRIO table (Eora) in addition to data from the International Labour Organization, ASEAN Occupational Safety and Health Network (ASEAN-OSHNET) and others. This study finds that in 2010 there were 12 fatal and 4.8 thousand non-fatal incidents, 27 thousand days lost and two million US$ lost in wages per 100 thousand workers in supply chains worldwide. The results presented in this paper show hidden accidents throughout global supply chains and hence can be used to apply pressure on international organisations, governments and focal companies to improve the conditions of workers, particularly in terms of OSH in the workplace.

Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Habits are an important cause of sluggish consumption adjustment in response to price shocks. This paper studies shifts within the consumption bundle under endogenous habit formation. I put forward a model with good-specific, or ’deep’, habits that cause persistence in good-specific consumption. In addition, at the aggregate level, habits act as a benchmark against which consumption is evaluated. I evaluate dynamic consumption choices under the realistic assumption that the consumer imperfectly internalizes the habit formation process. I compare consumption choices to the welfare-maximizing choices, and determine the path of taxes or subsidies that implements first-best consumption, both when goods are produced competitively and when they are produced by monopolists. I establish that a transition to a new consumption bundle is more likely inefficiently sluggish if the persistence effect is relatively strong. Strategic pricing behavior by monopolists leads to inefficiently rapid transitions. To explore the quantitative implications of the model I consider the introduction of a 10 percent charge on a subset of goods. I find that consumption adjusts inefficiently fast; implementing first-best adjustment requires a transitory discount of up to 60 percent of the cost increase.

Further evidence on the law of factor proportionality in multiple households closed CGE models

ABSTRACTThis article provides additional evidence that factor contents of different consumers’ consumption bundles computed from multiple households closed Computable General Equilibrium (CGE) models are approximately proportional. This empirical regularity has been observed up to now for a total of 11 CGEs for very diverse countries, and we therefore state it as law. It implies that these models display price rigidity with respect to endowment re-allocations, an observation which has broad implications for their capacity to capture general equilibrium effects.

The relation between price setting in markets and asymmetries of systems of measurement of goods

Markets, in an increasingly globalized world, have still dissimilar systems of measurement of goods due to different historical developmental paths of nations. A problem in economics is whether and how these asymmetries of systems of measurement of goods affect the prices in markets. The present study confronts this problem here by analyzing some prices of goods in U.S. and Italian economies that apply different systems of measurement of mass and liquid (i.e., United States Customary System vs. Metric System). The inductive study analyses the prices of milk, per gallon and liter, and the prices of a consumption bundle of fresh vegetables and fruit, per pound and kg, between the USA and Italy. The statistical evidence seems in general to support the hypothesis that differences of prices per same quantity and/or volume of good can be also explained by asymmetries in systems of measurement adopted in markets. In particular, results show that markets with basic units of measurement of mass and/or liquid having more quantity of good, e.g. kg rather than pound (0.4535kg) and/or gallon (3.78 Liter) rather than liter, induce lower levels of average price per same quantity, ceteris paribus. These findings may be due to relativity of cognitive processes of decision makers, which apply frugal way of reasoning in price setting, based on satisficing behaviour and bounded rationality, by associating a legal basic unit of measurement of mass and/or liquid to an official monetary unit. Hence, this study shows that basic units of measurement of goods with more quantity seem to generate lower average prices in markets and, as a consequence, higher benefits for consumers. The main aim of this article is therefore to clarify and to generalize whenever possible, the relation between dissimilar systems of measurement of goods and price setting in markets of different countries.

Good‐Specific Habit Formation and the Cross‐Section of Expected Returns

ABSTRACTI study asset prices in a general equilibrium framework in which agents form habits over individual varieties of goods rather than over an aggregate consumption bundle. Goods are produced by monopolistically competitive firms whose elasticities of demand depend on consumers' habit formation. Firms that produce goods with a high habit level relative to consumption have low demand elasticities, set high prices for their product, have low expected returns on their stock, and have low asset pricing betas and stock return volatilities. I find supportive evidence for these predictions in the data.