Consumption Bundle Research Articles

Local public good equilibrium

We extend ratio equilibrium to local public good economies by defining Local Public Good Equilibrium (LPGE). We employ “share functions” for individual agents that allow easy comparisons of consumption utility, both across consumption bundles and across jurisdiction memberships. Share functions furthermore aggregate for parsimonious calculation of equilibrium public good provision within each potential jurisdiction, allowing us to establish a link with hedonic games and deploy results from that literature. We demonstrate in examples how this enables us to show LPGE existence for a far wider class of economies than prior work seeking to extend ratio equilibrium to local public good economies. In particular, we demonstrate LPGE existence with heterogeneous agents, a finite number of agents and jurisdictions, endogenous jurisdictional revenues and expenditures, and robustness against coalitional deviations. LPGE admits wide-ranging jurisdiction structures, and we demonstrate how it can generate results on sorting that have attracted interest in the extant literature.

Nonsubstitutable Consumption Growth Risk

Standard applications of the consumption-based asset pricing model assume 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 nondurables. As a consequence, energy consumption affects the pricing function as a separate factor. Variation in energy consumption betas explains a large part of the premia related to value, investment, and operating profitability. For example, value stocks are typically more energy intensive than growth stocks and thus riskier, because they suffer more from the oil supply shocks that also affect households. This paper was accepted by Lukas Schmid, finance. Funding: C. Schlag gratefully acknowledges research and financial support from the Leibniz Institute for Financial Research SAFE. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.01269 .

Income tax evasion and third‐party reported consumption and wealth: implications for the optimal tax structure

AbstractTax authorities increasingly make use of third‐party reported consumption expenditures when appraising individual income reports. They may initiate an audit if consumption reports cannot be justified by self‐reported income. This in turn incentivizes tax evaders to avoid third‐party reported consumption goods. I determine the implications of this for the optimal tax structure. A tax on non‐reported goods discourages tax evasion because these goods are disproportionately consumed by tax evaders. A tax on reported goods also discourages tax evasion because it further distorts the evader's consumption bundle. I show that it is desirable to tax third‐party reported goods at a higher (lower) rate than non‐reported goods if the elasticity of substitution between both goods is smaller (larger) than one. I then apply the same logic to third‐party reported wealth – i.e., future consumption goods – which tax authorities also use in their audit policies. Existing evidence on the intertemporal elasticity of substitution suggests that it may be optimal to tax third‐party reported wealth at a positive rate.

Footprint analysis and the incidence of emission taxes

We show that the incidence of emission taxes on consumer income classes is proportional to the footprints of their respective consumption bundles. The dimensions of the footprints are industry by product, but the literature employs industry-by-industry input-output coefficients. We rectify footprint analysis by returning to the underlying national accounts, the use and make tables. Bringing in budget shares data of the different income classes (Engel curves), we show that the carbon dioxide footprint per euro expenditure decreases with income in the Netherlands. Our result renders an emission tax regressive and thus implies a tradeoff between environmental and income policies.

Engel curves on outsourcing and foreign environmental taxes: A valued‐added approach

AbstractThis paper estimates Engel curves on the foreign content (outsourcing) and the foreign environmental taxes embedded in the consumption of final goods and services in the United States (U.S.). We estimate Engel curves using U.S. household income and consumption information from 1996 to 2011 and find that they are concave and shift down over time. Importantly, our results suggest a coherent picture where the foreign content and the foreign environmental taxes in U.S. household consumption bundles decreased on average over time primarily because of a composition effect where the significant income increase has led to a shift in consumption towards goods and services with lower foreign content and lower foreign environmental taxes. Both effects represent a movement along their respective Engel curves. Consequently, other effects besides income changes play a minor role in the evolution of consumer decisions and their relationship with foreign content and environmental taxes.

An agent‐based model of consumer demand

AbstractThis paper studies an agent‐based model of consumer demand. Agents are heterogeneous with respect to their preferences and incomes. There are two basic ingredients in the model. The first ingredient is a metric that captures the degree of heterogeneity between agents. The second ingredient is a serial computer algorithm that is used in order to compute a terminal consumption bundle at which income is exhausted and overall utility is maximized. Agents are clustered into heterogeneous groups based on their preferences and incomes. We extract information about the evolution of consumer expenditure under different price regimes and the buildup of optimal demand for varying levels of income and preference parameter values. These features cannot be obtained in the classical framework of static utility maximization. Our agent‐based data‐driven methodology can be applied to any relevant data set and so provide a reliable model for forecasting demand given some agent characteristics.

Shopping behavior and the effect of monetary policy on inflation heterogeneity along the income distribution

This paper studies the effect of monetary policy on inflation along the income distribution in the euro area and shows that monetary policy has differential effects. In response to monetary tightenings, high-income households engage in more intense product substitution and trade down in the product and store space relative to low-income households, such that their inflation responds relatively more. This channel stands in contrast to the effect arising from different consumption bundles, which imply that the inflation experienced by high-income households responds less to monetary policy. The paper also reveals substantial cross-country heterogeneity, with the product substitution channel being more pronounced in countries where price differences between possible substitutes are larger.

Brazilian macroeconomic dynamics redux: Shocks, frictions, and unemployment in SAMBA model

This paper documents the recent changes in the structure and estimation procedures of the SAMBA model, providing a complete description of the decision problems that each economic agent faces, the first order conditions that solve those problems, and the new techniques employed to estimate the model. This updated version of the model incorporates new features, such as involuntary unemployment, imported goods in the consumption bundle and a new identified vector auto-regressive process for the rest of the world. Reflecting these changes, the set of observables was expanded to include, for instance, participation rates in the labor market and an exogenous measure of output gap. In face of increased complexity and the large number of observables, the model was estimated using Sequential Monte Carlo (SMC) methods, allowing for a smaller sensitivity to the choice of priors.

What fraction of antebellum US national product did the enslaved produce?

This article evaluates the high-profile claim that enslaved African-Americans produced over 50 percent of US national product in the pre-Civil War period. The accounting exercise shows the fraction was closer to (and indeed likely slightly below) the share of the population, that is, about 12.6 percent in 1860. The enslaved population had higher rates of labor force participation, but they were also forced to work in sectors–agriculture and domestic service—with below average output per worker. The economic surplus generated by the enslaved was due chiefly to the low value of the very basic consumption bundle provided rather than to exceptionally high values of production per capita.

Price-setting heterogeneity and robust monetary policy in a two-sector DSGE model of a small open economy

The choice between targeting headline and core inflation is crucial in times of large supply shocks. We investigate this issue in a multi-sector dynamic stochastic general equilibrium (DSGE) model of a small open economy with price-setting heterogeneity in two sectors: the production of food and energy goods and the remaining goods and services. In this framework, we determine optimal monetary policy rules robust to uncertainty in the economic environment. To illustrate the application, we estimate the model on Polish data and show that reacting to core inflation is more welfare improving than headline inflation targeting; however, the choice between the headline and core inflation rules depends on country-specific factors. These factors include the sectoral degree of openness, supply and demand shocks structure, the share of food and energy in the consumption bundle, and the level of competitiveness. Finally, we propose a robust price index and show that the optimal weight assigned to core inflation is higher than when parameter uncertainty is neglected.

On the neutrality of socially responsible investing: The general equilibrium perspective

This paper investigates the conditions under which socially responsible investment (SRI) is neutral from the viewpoint of general equilibrium theory. Three conditions are jointly sufficient for neutrality of SRI. First, the financial market is complete and SRI does not compromise the spanning opportunities it provides. Second, consumers' rankings of consumption bundles are unaffected by their asset holdings. Third, firms maximize shareholder value. Under an additional assumption that is satisfied, e.g., if SRI takes the form of negative screening, the taxes and transfers needed to implement a Pareto‐optimal allocation are the same as in the absence of SRI. SRI is neutral despite financial market incompleteness if there are perfect substitutes for targeted stocks.

Inequality, poverty and the composition of redistribution

We study the use of social expenditures and regulation for redistribution. When regulated goods are essential in the consumption bundle of the poor, a high poverty rate creates incentives to increase redistribution through regulation. By contrast, inequality directs redistribution towards social expenditures. We propose a theoretical model that captures the trade-off between these two redistributive policies and test the model implications with a novel municipality dataset on income and local government policies. Theory predicts and empirical evidence supports that failing to account for poverty biases the effect of inequality on redistribution. Our evidence also reflects the positive connection between poverty and the use of regulation for redistribution.

Order-Preserving and Order-Reversing Mappings between Consumption Bundles and Utilities

Economics and management believe that income and price play decisive roles in consumer demand for commodities. However, there is no analysis of the order-preserving or order-reversing mapping between consumer demand and utility when income and price are not constrained. Customer utility is always determined by the amount of commodities in real life. This research analyzes the mapping relationship between the amount of commodities and utility. The set which consists of consumption bundles with a binary relation is a poset. The set of utility values with the binary relation is a chain. Furthermore, the relationship between consumption bundles and utilities is illustrated by figures. If the increasing directions of utility and the amount of commodities are consistent, the utility function is order-preserving. If they are opposite, the utility function is order-reversing. Finally, examples are included to illustrate the mapping relationship between consumption bundles and utilities.

The value of social status

We quantify the value of social status using secondary market prices for Delaware license plates. Delaware plates are numbered sequentially, are private property, and can be legally bequeathed or traded. In Delaware, they are a valuable source of social status. Market prices suggest a preference for lower plate numbers and there are extreme price jumps that are consistent with exclusive low-digit clubs. The aggregate value of this market indicates that people purchase status as a significant portion of their consumption bundle. Finally, social status as an asset appears to be uncorrelated with aggregate economic and market conditions.

The Shock Reaction in a Simple Close Economy

As the general objective of a representative government is to achieve in creating the economic conditions that support the wellbeing of citizen, it, thus, needs to design and implement its policies in an appropriated manner. Hence, to support the valuable information for designing and implementing such policies, this work is designed to gain that information by trying to identify the reactions of various variables to government policies. To meet this objective, this work proposed a simple close economy Dynamic stochastic general equilibrium (DSGE) model with the public goods in the household consumption bundle. Also, the usual shocks studied in the DSGE model were included in the reaction investigation process. The Bayesian technique is then employed to estimate the model parameters by using the quarterly detrended data of Thailand in the period of 2001 to 2019. The result showed the crowding-out effect driven by government spending. Also, the reactions of the major macroeconomic variables to each shock were consistent with some previous studies.

Well-Being, Poverty, and Labor Income Taxation: Theory and Application to Europe and the United States

In a model where agents differ in wages and preferences over labor time–consumption bundles, we study labor income tax schemes that alleviate poverty. To avoid conflict with individual well-being, we require redistribution to take place between agents on both sides of the poverty line provided they have the same labor time. This requirement is combined with efficiency and robustness properties. Maximizing the resulting social preferences under incentive compatibility constraints yields the following evaluation criterion: tax schemes should minimize the labor time required to reach the poverty line. We apply this criterion to European countries and the United States. (JEL H23, H24, I31, I32, J22)

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 intertemporal plans (e.g., consumption streams) must be continuous functions of time. We assume that 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.

Consumer Choice Rule While Examining Similar Consumption Bundles: Rational Choice to Behavioral Bias

The study tries to recognize the behaviour of the consumer with respect to the opportunity cost and marginal benefit associated with the commodity. The research tries to evaluate the factors and identify behavioural traits of consumers if they exist in decision making. The study also tries to recognize the prime factors responsible for directing the consumer’s purchasing decision towards the commodity. The study finds out that the Behavioural traits influence the decision-making approach while purchasing the commodity and how prominent factors direct the consumer decision.

Recovering Preferences From Finite Data

We study preferences estimated from finite choice experiments and provide sufficient conditions for convergence to a unique underlying “true” preference. Our conditions are weak and, therefore, valid in a wide range of economic environments. We develop applications to expected utility theory, choice over consumption bundles, and menu choice. Our framework unifies the revealed preference tradition with models that allow for errors.

Urban household consumption in China: Price, income, and demographic effects

AbstractGiven the government’s goals to restructure the economy away from investment and exports to consumption and to reduce inequality, it is important to have a good understanding of China’s household consumption behavior and to obtain a good measure of consumption adjusted for price differences across regions. We estimate a consumption function that is flexible and distinguishes between different household types such as size and age of head. We develop detailed price data by region, including rental equivalents for owner‐occupied housing. This provides us the estimates of income and price elasticities of different consumption bundles that should be useful for analyzing public policies. We find distinct elasticities for residents of large and small cities. For all urban households the income elasticity for food is about 0.7–0.8, housing is 0.8–0.9, and services is 1.4–1.5. The price elasticity for food and services is about 0.5 and 0.8, respectively.