Income Elasticity Research Articles

Why Office of Management and Budget’s (OMB) Social Welfare Function Is Not Society’s Social Welfare Function

Abstract In 2023, the U.S. Office of Management and Budget (OMB) issued guidance documents that specified new procedures for assessing prospective government regulations (Circular A-4) and economic policies more generally (Circular A-94). These revisions to long-standing guidance were not minor updates but shifted policy analyses from an efficiency-oriented perspective to a redistributive approach. OMB broadened the guidelines for reporting distributional consequences of policies and also specified how policy impacts on different income groups should be weighted. The weights assume that the social welfare function is governed by the sum of identical individual utility functions, each of which exhibits a substantial rate of diminishing marginal utility of income. The resulting weights provide a premium for households below the median-income level and a considerable penalty for those at higher-income levels. Application of the weights to property losses creates potentially substantial inefficiencies. If based on current empirical evidence on the income elasticity of the value of a statistical life rather than assuming that there is a complete offset of the weights, application of the weights to mortality risk valuation would generate inequities in protection.

Time-Varying Income and Price Elasticities of Oil Demand in OECD Countries

This study examines the long-run income and price elasticities of oil demand in 21 OECD countries using quarterly data from 1980:Q1 to 2021:Q3. We find that oil demand is inelastic with respect to both income and prices at 0.117 and −0.179, respectively. The cointegration tests reveal instability in oil price elasticities over time. The time-varying panel data estimates support these findings, showing significant variations in elasticities influenced by oil market dynamics and global events. Income elasticities reached their highest levels during the COVID-19 pandemic, while price elasticities ranged from −0.396 to 0.275. Significantly, the sign of oil price elasticities shifted from negative to positive after 2015, contrary to the law of demand, probably because of declining oil prices during that period. The largest positive and statistically significant price elasticity occurred in early 2020, which can be attributed to the COVID-19-induced decline in oil prices. Overall, this analysis contributes to understanding oil demand dynamics and highlights the impact of economic and oil market factors on elasticities.

Does the income elasticity of energy demand vary with the stages of economic development?

This paper revisits the empirical evidence on the income elasticity of energy demand by investigating whether it varies with the level of economic development. We estimate the elasticity using mean-group type estimators for a sample of 111 countries spanning three decades. Our analysis reveals that the elasticity is not constant and tends to decline as countries become wealthier. As economies become more developed, their energy intensity falls, eventually reaching zero elasticity, indicating a decoupling between economic growth and energy demand. This finding underscores the importance of considering countries’ stages of economic development when making energy outlook projections.

Long-Run Equilibrium Between Military Expenditure and GDP with Non-Linear Structural Breaks in NATO Member States

ABSTRACT This paper studies stationarity and cointegration of military expenditure and GDP for two subsamples of NATO member states. In particular, we employ newly developed unit root and cointegration tests which approximate an unknown number of smooth structural shifts in the low-frequency components of a Fourier expansion. The new unit root test indicates that military expenditure and GDP are non-stationary. Given the presence of several gradual shifts in the cointegration regression, our empirical results support the existence of stochastic comovement between military expenditure and GDP in the NATO member states. Additionally, we identified that income elasticities of the new member states are larger than those of the old member states, which implies that new member states appear to be more flexible, with their military expenditures more easily scaled up or down in accordance with economic performance.

Using Survey Data to Estimate Intergenerational Mobility in Income and Education in Portugal

AbstractPrevious studies about intergenerational mobility for the Portuguese economy find that education and income persistence is very high in comparison with other developed economies. We construct relative, absolute, global and local measures of mobility for Portugal, comparing them with existing evidence for this and other countries. These are the intergenerational income elasticity (computed using the two-sample two-stage least squares method), income correlation, rank-rank slope, bottom to top income level probability, the share of individuals earning more than their fathers and also the intergenerational education correlation, the low to high education level probability, and the share of individuals with a higher education level than their fathers. We consider the 1968–1988 cohorts and the 1995 and 2019 waves of the European Community Household Panel and the European Union Statistics on Income and Living Conditions, respectively. Overall, based on the point estimates, women seem to present more mobility in income. Upward income mobility is verified at the bottom while persistence exists at the top. Women present a greater absolute educational mobility. More than 80% of individuals have a higher education than their fathers and full upward education mobility exists for children of low-educated fathers. Mobility in education is higher for the offspring of medium–high-income fathers. Individuals with a high education level, in the medium–high income level or with occupations requiring a higher education level show higher mobility.

Long-Term Forecasting Models of Oil Demand Emerging from the Global Petrochemical Sector

In the global energy mix by 2040, the growth in demand for oil and gas will be predominantly driven by the petrochemical sector across all regions of the world. The strong performance of this industry is anticipated to necessitate additional volumes of key feedstocks. Therefore, understanding the demand dynamics within the petrochemical sector is crucial for policy makers and industry stakeholders to make informed decisions regarding economic diversification, economic planning, and environmental sustainability. However, there is a notable lack of existing literature that explicitly addresses comprehensive regional and product-level demand modeling for petrochemical feedstocks. In this context, this study aims to estimate the demand for four main petrochemical feedstocks (Naphtha, Ethane, Liquefied Petroleum Gas (LPG), and other petrochemical feedstocks) across eight regions of the world. By estimating a total of 30 equations for price and income elasticities of demand in both the short and long term, the study provides detailed insights into the factors driving demand across different regions. The results demonstrate the robustness of the model, with good econometric properties and significant coefficients. In-sample regional simulations revealed small percentage errors across all regional equations, highlighting the model’s accuracy in tracking historical data. For each of the four feedstocks, an aggregate world equation—in other words, one single econometric world equation for each of the four petrochemical feedstocks’ categories mentioned earlier—was also estimated and compared against the aggregation of the regional simulations, with the latter found to track the history of global petrochemical feedstock demand better in-sample than a single econometric world equation. Overall, the study offers valuable contributions to the existing literature by filling a gap in comprehensive demand modeling for petrochemical feedstocks. It underscores the importance of regional and product-level analyses in understanding global demand patterns and informing strategic decisions in the industry.

Vehicle miles traveled induced demand, rebound effect, and price and income elasticities: A US spatial econometric analysis

The economic literature on transportation is extensive, with travel demand being a well-studied topic. However, research on light-duty vehicle travel has not fully explored spatial dependencies arising from neighboring regions' driving activities. This study uses state-level panel data from 2000 to 2019 to examine U.S. vehicle miles traveled (VMT), focusing on spatial spillover effects through a Spatial Durbin Model. Our results reveal significant spatial interactions between states. Increased VMT in one state leads to spillover effects, increasing VMT in neighboring states. We present our findings as marginal effects, distinguishing between direct and indirect impacts. The direct price elasticity is estimated at −0.257, with a positive spillover impact of 0.036, yielding a total elasticity of −0.221. Induced travel exhibits a larger indirect effect than a direct effect, resulting in an overall impact of 0.276. Additionally, direct and total income elasticities are 0.194 and 0.146, respectively, while direct and total fuel economy rebound effects are 0.546 and 0.496, respectively. Moreover, higher numbers of licensed drivers, registered vehicles, and urbanization significantly influence a state's VMT. This research highlights the importance of regional planning among states, especially considering transportation infrastructure and environmental concerns related to driving and vehicle emissions.

Long-Term Elasticity of Environmental Demand: Environmental Protection Expenditures in Sweden, 1972–2020

This study uses reconstructions of historical Environmental Protection Expenditure Accounts (EPEA) in Sweden from 1970–2020 to present a time series approach that analyses the demand for environmental services. The paper’s aim is to analyse environmental adaptation as a historical, economic and environmental process and to explore structural shifts suggestive of an overall periodisation of environmental demand. The article contributes to a deeper understanding of demand-side factors in environmental adaptation as part of contemporary economic history. The investigation also provides evidence that the income elasticity of environmental demand was slightly higher than 1.0 and largely stable over time, and even though we were able to detect trend breaks, there is insufficient evidence for major structural breaks suggesting sharp shifts in societal environmental preferences. Policies requiring sharply rising environmental expenditures should consider this level of historical stability. This article was published open access under a CC BY licence: https://creativecommons.org/licences/by/4.0 .

From Earnings to Occupations: Understanding Intergenerational Mobility inTurkey

The studies analyzing intergenerational economic mobility have been rather scarce for developing countries due to unavailability of longitudinal datasets. This study uses data from Survey of Income and Living Condition (SILC) from2006- 2021, obtained from Turkish Statistical Institute to analyze the intergenerational income and occupational mobility in Turkey. Besides measuring the dynamics of income and occupational mobility across generations, we also analyze howdoes the association of children socioeconomic outcome with their family backgroundvary at different career levels of children. Our findings reveal that the associationwith parents income is much higher for daughters as compared to sons suggestingdaughters outcomes are more explained by their family socioeconomic status. Regarding the association of children’ outcome with family status at different career stage, the relationship is stronger when children are at the mid-career level. The Bayesian methodology and Pseudo-panel fixed effect model has beenemployed to estimate intergenerational income elasticity and for the rest of the analysis, Bayesian methodology has been utilized. Our finding also reveals higher intergenerational occupational persistence among children in higher income families while children from disadvantaged families have higher probability of switching career upon receiving good education and income perspective.

Differential Bunching Impacts Across the Income Distribution: Evidence from Tax Administrative Data

AbstractWe investigate the behavioural responses of individual taxpayers to changes in marginal personal income tax rates applying empirical bunching methodology to tax administrative data from Zambia over the period from 2014 to 2021. We find evidence for excess bunching at the first kink in the tax schedule for all years but less evidence of bunching at the second and third thresholds. While bunching is considerable and behavioural responses are observed to changes in the location of the kinks over time, bunching at reference points (’round-number bunching’) also appears large. Implied elasticities of taxable income are however not remarkable, and comparing actual and estimated counterfactual wage distributions reveal that missed tax revenue arising from the excess bunching is limited. This is consistent with the observed bunching reacting sharply and immediately to changes in the location of the kink points over time, suggesting that observed behavioural change is driven by reporting behaviour rather than real economic responses.

Can digital financial inclusion facilitate intergenerational income mobility? Evidence from China

We present an empirical study on the impact of digital finance development on intergenerational income mobility. Combining nationally representative Chinese household survey data with indices for digital financial inclusion (DFI), we find that the development of digital finance leads to a lower correlation between children's income and their fathers’ income, significantly enhancing intergenerational mobility. Specifically, a one standard deviation increase in the DFI index is associated with a decrease in intergenerational income elasticity by 0.04–0.05. The effect is particularly pronounced in rural and inland regions. Furthermore, we find that digital finance development stimulates household entrepreneurial activities, which in turn enhance the role of digital finance in reducing intergenerational income correlation.

Migration from developing countries: Selection, income elasticity, and Simpson’s paradox

The economic causes and effects of migration from developing countries depend on patterns of self-selection that are difficult to observe. We estimate the degree of migrant self-selection—on both observed and unobserved determinants of income—for 99 developing countries using nationally representative survey data on 653,613 people. In low-income countries, people actively preparing to emigrate have 14 percent higher incomes explained by observed traits such as schooling, and 12 percent higher incomes explained by unobserved traits. The simulated income elasticity of emigration is positive in the aggregate (+0.23) despite being negative in subpopulations, an instance of Simpson’s paradox.

Company cars and household car choices

Tax systems that favour company cars for personal use could cause households to have more cars. It could also affect the choice of fuel type. We investigate the relationship between household car choices and access to a company car through a difference-in-differences design using Norwegian microdata. We find that access to a company car is associated with an increase in the total number of cars and the number of combustion-engine cars. For electric cars, the results are inconclusive. However, wage growth and access to company cars are also positively correlated. Therefore, we cannot interpret the difference in the number of cars between the treatment and control groups as a causal effect of the company car scheme, but as a correlation. Still, existing evidence on the income elasticity of car demand suggests that the increase in the number of cars is unlikely to be driven by wage growth alone.

Nonlinear Economic State Equilibria via van der Waals Modeling.

The renowned van der Waals (VDW) state equation quantifies the equilibrium relationship between the pressure P, volume V, and temperature kBT of a real gas. We assign new variable interpretations adapted to the economic context: P→Y, representing price; V→X, representing demand; and kBT→κ, representing income, to describe an economic state equilibrium. With this reinterpretation, the price elasticity of demand (PED) and the income elasticity of demand (YED) are non-constant factors and may exhibit a singularity of the cusp-catastrophe type. Within this economic framework, the counterpart of VDW liquid-gas phase transition illustrates a substitution mechanism where one product or service is replaced by an alternative substitute. The conceptual relevance of this reinterpretation is discussed qualitatively and quantitatively via several illustrations ranging from transport (carpooling), medical context (generic versus original medication), and empirical data drawn from the electricity market in Germany.

Analysis of Rice Demand in Klaten Regency

This study aims to analyze the influence of rice prices, population size, and income on rice demand, as well as to determine the elasticity of rice demand in Klaten Regency. A descriptive analysis method was employed using secondary time series data over a period of 10 years (2013-2022), which included rice demand and population data. The data analysis model applied was multiple linear regression and classical assumption tests. Hypotheses were tested using t-tests, F-tests, and R-squared tests. The results indicate that: 1) Rice prices have a negative influence on rice demand, with a p-value of 0.06; 2) Population size has a positive influence on rice demand, with a p-value of 0.003; 3) Per capita income positively influences rice demand, with a p-value of 0.004; and 4) Rice demand is inelastic, as the price elasticity coefficient (0 < Ep < 1) suggests that changes in rice demand are smaller than changes in rice prices. Income elasticity (EI > 1) indicates that rice demand increases significantly with higher income levels.

A novel suggestion on how to adequately treat stochastic non-stationary seasonality in tourism export forecasting

Using a quarterly data sample of 28 EU countries ranging from 2004Q1 to 2016Q4, real tourism exports are modeled and estimated as a function of relative tourism export prices and aggregate real GDP. For almost all countries, HEGY tests applied to first-differenced variables cannot reject the null hypothesis of the presence of seasonal unit roots. Seasonal differencing would be necessary to remove the seasonal patterns from the data, yet employing seasonally differenced data results in information loss, distorted elasticity estimates, and mediocre forecast accuracy. Our suggestion is therefore to perform estimation and forecasting for each quarter separately. This approach avoids the use of seasonal differencing, results in plausible, seasonally varying estimates of income elasticities, and yields statistically significantly superior forecast accuracy, also in comparison to two data-driven benchmarks for seasonal data (i.e., SARIMA and ETS).

Income Elasticity of Demand for Healthcare and Change Over Time: Across the Income Groups in India

The study computes the income elasticity of out-of-pocket healthcare expenditures (OOPEs) of Indian households across the income groups. Using data from the National Sample Survey Organization for the 71st (2014) and 75th (2018) rounds, a log-linear model with splines estimates the elasticity of healthcare expenditure across different income segments. The analysis controls for demographic variables and employs dual deflation to adjust for price changes. The elasticity magnitude depends upon the marginal propensity to OOPE (MP-OOPE), which is inconsistent across the income groups. The random MP-OOPE is due to the non-linear relationship between income and healthcare expenditure. The data revealed increased income (proxied by household consumption expenditure) and decreased average OOPE in wave 2. Despite this, households in the bottom income bracket experience a rise in elasticity, and those at the top observe reduced elasticity in wave 2. The income group-wise MP-OOPE suggests uncertain healthcare demand patterns and evidence of widening healthcare inequality. Poorer households either face low-magnitude inelastic healthcare demand, leaving their healthcare needs unmet, or experience high-magnitude inelastic demand, leading to financial hardship. Policies should aim to reduce out-of-pocket healthcare expenses for vulnerable groups. Expanding public-funded risk pooling mechanisms like Pradhan Mantri Jan Arogya Yojana would be crucial in addressing this issue.

The relationship between health-care expenditure and disposable personal income: a panel econometric analysis on the EU countries

PurposeWhen the factors affecting health expenditures are examined in the literature, it is seen that one of the most important factors is income. In this context, the purpose of this study is to investigate the relationship between out-of-pocket health expenditures and disposable personal income and revealing the income elasticity of health expenditures.Design/methodology/approachTherefore, short/long-term coefficients were obtained by analyzing Westerlund (2007) co-integration analysis and pooled mean group (PMG) regression methods for 22 European Union (EU) member states during the period 2003–2017. In addition, a comparison of the long-term coefficients for each country was obtained with augmented mean group (AMG) estimator.FindingsThe results of the AMG and PMG tests show that the long-term coefficients between disposable personal income and health expenditures are 0.83 and 0.97, respectively. These results imply that there is a significant relationship between the variables, and that health care should be categorized in the group of normal goods. However, the fact that the long-term coefficient is very close to 1, despite being classified in the category of necessity goods, requires more care to be taken in evaluating whether health services are luxury goods or necessity goods.Originality/valueThe use of second generation econometric tests on both cross-sectional dependence and heterogeneity demonstrates the value of the study. On the other hand, obtaining similar results by investigating the relationship between variables using different appropriate econometric models reveals the importance of the methodology used in this study. It reveals important details in terms of the literature regarding the long-term and short-term results obtained in this study.

The demand for sparkling wine: insights on a diversified European market

PurposeThe article aims to study the demand for sparkling wines in Europe. The main objective is to estimate the classic demand parameters aggregately for the entire European area (European Union and the United Kingdom) and separately for groups of countries characterized by wine markets with similar characteristics.Design/methodology/approachUsing 15-years market data for different wine categories from the Euromonitor Passport database, the estimation of price and income elasticities is performed through a Quadratic Almost Ideal Demand System. In line with the objectives, the model is applied first to the whole European area and then separately to the considered groups of countries (subareas). To identify homogeneous subareas, a cluster analysis was performed on basic characteristics of the wine market.FindingsWhen considering the European market as a whole, sparkling wines should be considered a luxury category with a high own-price elasticity. However, the structure of their demand is rather different in different sub-areas. The observed heterogeneity suggests that differentiated policy and marketing considerations should be made. In addition, it widens the possibilities for producers, who can choose the submarkets that respond best to their needs to export their sparkling wines. This seems particularly important in markets, like the sparkling wine ones, that are experiencing a continuous expansion over the last decades.Originality/valueDespite using a methodology well-established to study wine and alcohol demand, the study fills a considerable gap in the literature. Although the demand for sparkling wine is growing worldwide, so far only a couple of studies have engaged in the analysis of its structure. In Europe, the largest market for sparkling wine, this kind of studies is completely lacking.

The rise of internet-only banks: Analyzing the bias in cross-prefectural money demand elasticity

In 2021, new bank forms, such as Internet-only banks, amassed 2 % of Japanese deposits. Tokyo’s statistics since 2005 encompass deposits in such banks, regardless of depositor location. These Tokyo-based banks operate branchless. Elevated deposits reported in Tokyo, Japan’s highest-income prefecture, could skew the income elasticity of money demand upwards in a cross-sectional regression. This study proposes reallocating Tokyo’s bank deposits to all prefectures to quantify the bias. Additionally, it suggests aggregating fifteen prefectures into five areas to address discrepancies between the deposit and income locations owing to cross-prefectural commuting. Adjusting for new bank deposits, the income elasticity of money demand decreased from 0.899 to 0.872 in March 2021, with overestimation increasing since March 2005. These findings suggest the adequacy of regional statistics in reflecting economic behavior in the digital era, warranting reevaluation.