In the last years, much of the debate on fiscal stimulus vs. austerity was centered on the measurement of government spending multipliers. And to a large extend this was a debate between those how used dynamic stochastic general equilibrium (DSGE) models, finding small multipliers, and those using reduced form models, finding large multipliers. Both strategies have pitfalls, the structural one in that the model may be miss-specified as it is always an abstraction of a complex reality, the reduced-form one because of the Lucas Critique.
Patrick Fève, Julien Matheron and Jean-Guillaume Sahuc make the point that there could be a source of downward bias in the estimation of the elasticity in structural models. It arises from ignoring the endogeneity of government expenses combined with complementarity between public and private consumption. With exogenous expenses, the elasticity is 0.97 for the United States, with endogenous ones, it is 1.31. No small potatoes.
Showing posts with label consumption. Show all posts
Showing posts with label consumption. Show all posts
The deadweight loss of gift certificates
Giving gifts in kind induces large deadweight losses, as I discussed in one of my very first blog posts. The basic idea is that people do not value their gifts as much as they would be willing to spend on, or at least that they would have spent the cost of the gift in a Pareto-improving way. If instead of receiving a gift in kind one obtains a gift card, the added flexibility should give us a small to negligible deadweight loss. I would compare this to an incomplete market that can get close to complete, in well-being, with very few securities like government bonds.
Flóra Felsö and Adriaan Soetevent study spending habits of gift certificate recipients. They find that the vast majority is not really constrained by having to buy at a particular merchant and only alter a little bit the timing of their purchases. One in seven (more among females), though, considers the gift certificate separately from the budget constraint and buys something one could not afford. While these people are happy about it, there is obviously still a loss in well-being. Indeed, if they want this purchase so much, they would have bought it from the "normal" funds. All in all, the deadweight loss from gift certificates does not seem important.
Flóra Felsö and Adriaan Soetevent study spending habits of gift certificate recipients. They find that the vast majority is not really constrained by having to buy at a particular merchant and only alter a little bit the timing of their purchases. One in seven (more among females), though, considers the gift certificate separately from the budget constraint and buys something one could not afford. While these people are happy about it, there is obviously still a loss in well-being. Indeed, if they want this purchase so much, they would have bought it from the "normal" funds. All in all, the deadweight loss from gift certificates does not seem important.
House prices and consumption: how model specification matters
What is the impact of a decrease of house prices on consumption? If you go by the wealth hypothesis, one should see that home owners would reduce their consumption significantly because their wealth has suffered, while young renters are barely affected. According to the common factor hypothesis, both agent classes should respond in the same way, because they respond to common factors, for example future income prospects. It should be easy to test one hypothesis against the other and settle this. It turns out that using the exact same dataset, John Campbell and João Cocco could not reject the first, while Orazio Attanasio, Laura Blow, Robert Hamilton and Andrew Leicester could not reject the second. Well, that is embarrassing.
Annalisa Cristini and Almudena Sevilla Sanz replicate these results and show that because the two models are not nested, they cannot test against each other. Worse, it all boils down to the specification: estimate an Euler equation (which uses consumption growth) and the wealth hypothesis wins; estimate a consumption function, with consumption in levels, and the common factors hypothesis wins. So I am afraid it is not sufficient to estimate a single equation, one needs to estimate the whole structural model jointly.
Annalisa Cristini and Almudena Sevilla Sanz replicate these results and show that because the two models are not nested, they cannot test against each other. Worse, it all boils down to the specification: estimate an Euler equation (which uses consumption growth) and the wealth hypothesis wins; estimate a consumption function, with consumption in levels, and the common factors hypothesis wins. So I am afraid it is not sufficient to estimate a single equation, one needs to estimate the whole structural model jointly.
About beer
Beer has been an important part of human well-being, and this for thousands of years. While the economic literature has dealt rather little with it, many great papers have significantly evolved at the pub. Still, I have previously reported on a conference on the Economics of beer, and open source beer.
Now, let us talk about the economic history of beer, thanks to Eline Poelmans and Johan Swinnen. Brewing in the middle ages was he realm of monasteries, with rather small output and a lot of product diversity. With technological advances and reduction in transportation costs, commercial breweries took over and especially over the last hundred years they lead a remarkable trend towards consolidation. After all those mergers and acquisitions, product diversity was considerably reduced. This is all changing now, and tastes have become more sophisticated and local micro-breweries are on the upswing. In some ways, beer has become more like wine.
Now, let us talk about the economic history of beer, thanks to Eline Poelmans and Johan Swinnen. Brewing in the middle ages was he realm of monasteries, with rather small output and a lot of product diversity. With technological advances and reduction in transportation costs, commercial breweries took over and especially over the last hundred years they lead a remarkable trend towards consolidation. After all those mergers and acquisitions, product diversity was considerably reduced. This is all changing now, and tastes have become more sophisticated and local micro-breweries are on the upswing. In some ways, beer has become more like wine.
How to tax addictions
Addiction is most often a problem of self-control. If one is not capable of factoring in the future consequences of one's actions, one way to make this is taken into account is to distort prices appropriately. This is what taxes (and subsidies) are good at. While we know rather well how to design taxes on externalities born by others or the community, the case is more difficult for externalities inflicted on future selves.
Luca Bossi, Paul Calcott and Vladimir Petkov get on the case i the context of externalities, self-control issues and imperfect competition, as applicable for cigarettes and their highly concentrated industry. They also implement time-consistent taxes to accommodate the addiction, which means that people or government would not want to deviate from the social optimum. Taxes are thus state dependent and described by a rule. One important result is that combining addiction and imperfect competition leads to lower taxes that previously reported, because prices are already higher to start with if providers are oligopolistic. Were some drugs to be legalized, one has thus to keep in mind that the new market structure matters in the design of the new taxes.
Luca Bossi, Paul Calcott and Vladimir Petkov get on the case i the context of externalities, self-control issues and imperfect competition, as applicable for cigarettes and their highly concentrated industry. They also implement time-consistent taxes to accommodate the addiction, which means that people or government would not want to deviate from the social optimum. Taxes are thus state dependent and described by a rule. One important result is that combining addiction and imperfect competition leads to lower taxes that previously reported, because prices are already higher to start with if providers are oligopolistic. Were some drugs to be legalized, one has thus to keep in mind that the new market structure matters in the design of the new taxes.
Is chocolate milk hip?
Sports and energy drink have become popular in the past decades or rather dubious grounds, as the recover and boost effect claimed in ads are in many cases false. See for example Vitamin water and Gatorade. In fact, plain water has much better recuperating properties than most of these sports drinks. And so does apparently chocolate milk, which has prompted marketing campaigns in the US with many athletes as spokespersons.
Senarath Dharmasena and Oral Capps, Jr. try to find the determinants of the demand for chocolate milk using a Heckman two-step demand model. Unfortunately, no regression results are presented, but the authors hint at a few interesting results. A quarter of all US households consume chocolate milk, with an average of 12 liters a year per household. Then they claim a number of household characteristics are significant, but with no indication in which way they are. For example, education of the household head is significant, and Hispanic household head as well. It would be interesting to know whether the relationship is positive or not. And as the authors ask in their title whether chocolate milk is the new-age sports drink, I am intrigued as how they could have answered this question. There is nothing in the paper itself about it.
Why am I reporting on such a thin paper? Because it always struck me how Europeans view adults drinking milk and especially chocolate milk as childish, while is it perfectly accepted in the US. I was wondering whether this difference could be seen in an empirical demand equation. Not in that one, though.
Senarath Dharmasena and Oral Capps, Jr. try to find the determinants of the demand for chocolate milk using a Heckman two-step demand model. Unfortunately, no regression results are presented, but the authors hint at a few interesting results. A quarter of all US households consume chocolate milk, with an average of 12 liters a year per household. Then they claim a number of household characteristics are significant, but with no indication in which way they are. For example, education of the household head is significant, and Hispanic household head as well. It would be interesting to know whether the relationship is positive or not. And as the authors ask in their title whether chocolate milk is the new-age sports drink, I am intrigued as how they could have answered this question. There is nothing in the paper itself about it.
Why am I reporting on such a thin paper? Because it always struck me how Europeans view adults drinking milk and especially chocolate milk as childish, while is it perfectly accepted in the US. I was wondering whether this difference could be seen in an empirical demand equation. Not in that one, though.
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