Demographics in demand systems

Household composition can be expected to affect the allocation of household expenditure among goods, at the very least because of economies of scale as household size increases and because different people have different needs (adults versus children, for example). Specifying demographic effects correctly in demand analysis is important both in order to estimate correct price and expenditure elasticities and for the purpose of making household welfare comparisons. A common way of including demographics is as a function that scales total expenditure, and to make this scaling function indepen- dent of the level of total expenditure. A popular method in the parametric estimation of demand systems is to estimate share equations that are quadratic in the logarithm of total expenditure, but there is also a substantial literature on the semi-parametric estimation of Engel curves. We employ some of these semi-parametric techniques to show that, for some goods, further terms are likely to be required in the Engel curve addition to quadratic terms. We use this to identify the parameters of a scaling function that varies with total expenditure. Keywords: Demand analysis, demographics, base independence, semi-parametric.Demand analysis, demographics, base independence, semi-parametric

Explaining trends in household spending

In this paper we model the changing distribution of household spending in the UK over the period 1978 to 1999 and explore the interpretation of remaining time trends in spending once changes in other observed covariates have been accounted for.

Valuing a new good

This paper presents a nonparametric method for calculating a lower bound on the virtual or reservation price of a new good. This allows the welfare effects of product market innovations to be investigated. We illustrate the technique using consumer panel data.New goods, revealed preferences

A nonparametric method for valuing new goods

This paper presents a revealed preference method for calculating a lower bound on the virtual or reservation price of a new good and suggests a way to improve these bounds by using budget expansion paths. This allows the calculation of cost-of-living and price indices when the number of goods available changes between periods. We apply this technique to the UK National Lottery and illustrate the effects of its inclusion in measures of inflation. JEL Classification: C43, D11

A retail price index including the shadow price of owner occupied housing

How do house price changes affect the cost of living? The retail price index in the UK does not directly incorporate house price changes. Instead it uses mortgage interest to capture the cost of owning a home. This is a useful method from many perspectives. However, from a consumer welfare perspective, while mortgage interest does capture the cost of a particular service, it does not capture the cost of housing services. The shadow price of housing captures the welfare cost to a household of changes in housing prices. In this paper we create a new shadow price index using RPI data and the shadow price of housing and investigate how replacing the mortgage interest with the shadow price of housing affects measures of the cost of living.

Deadweight loss and taxation of earned income: evidence from tax records of the UK self-employed

Responses to changes in marginal income tax rates can be more complex than a simple adjustment in hours worked. Given this, a more inclusive way to assess the deadweight costs of taxes on labour income is to examine the effect of changes in the marginal tax rate on taxable income rather than on labour supply. In this paper we apply a grouping estimator to data from the UK Survey of Personal Incomes so assess the magnitude of taxable income responses of the self employed. Our results point to a modest degree of deadweight loss.

A nonparametric characteristics model of the demand for milk

Characteristics models in demand analysis capture the idea that people value goods not For the commodity itself but for the characteristics (or attributes) or embodied in the good. For example, agents may care about the fat content and the taste of different sorts of milk but not the actual type of milk. When we have fewer characteristics than types of good the theory imposes restrictions on observables. We present a revealed preference characteristics model analysis of the demand for milk in Denmark

Parental income and children's smoking behaviour: evidence from the British Household Panel Survey

Does money matter? When investigating health behaviour, research often finds a strong positive association between income and healthy behaviour. This could however be due to individual characteristics that determine both income and health investment and is not necessarily due to the role of money per se. In this study we look at this relationship over the generations by studying the association between parental income and children's prevalence to smoke in Britain using data from the British Household Panel Survey and British Youth Survey. We find an inverse relation between parental income and children's smoking prevalence, but when looking at within household changes by comparing sibling's smoking status differences at the same age, we find instead a positive effect. This indicates that within household increases in income lead to an increased probability of smoking of a younger child.Child smoking, Parental income, Panel Data

Who Benefits from Child Benefit?

Governments, over much of the developed world, make significant financial transfers to parents with dependent children. For example, in the US the recently introduced Child Tax Credit (CTC), which goes to almost all children, costs almost $1billion each week, or about 0.4$25 a week on each of about 8 million children – about 1% of GNP. The typical rationale given for these transfers is that they are good for our children and here we investigate the effect of such transfers on household spending patterns. The UK is an excellent laboratory to address this issue because such transfers, known as Child Benefit (CB) have been simple lump sum universal payments for a continuous period of more than 20 years. We do indeed find that CB is spent differently from other income – paradoxically, it appears to be spent disproportionately on adult-assignable goods. In fact we estimate that as much as half of a marginal pound of CB is spent on alcohol. We resolve this puzzle by showing that the effect is confined to unanticipated variation in CB so we infer that parents are sufficiently altruistic towards their children that they completely insure them against shocks.altruism, child poverty, intra-household transfers

Revealed preference analysis of characteristics models

Characteristics models have been found to be useful in many areas of economics. However, their empirical implementation tends to rely heavily on functional form assumptions. In this paper we develop a revealed preference approach to characteristics models. We derive the necessary and sufficient empirical conditions under which data on the market behaviour of heterogeneous, price-taking consumers are nonparametrically consistent with the consumer characteristics model. Where these conditions hold, we show how information may be recovered on individual consumer's marginal valuations of product attributes. In some cases marginal valuations are point identified and in other cases we can only recover bounds. Where the conditions fail we highlight the role which the introduction of unobserved product attributes can play in rationalising the data. We implement these ideas using consumer panel data on the Danish milk market.product characteristics; revealed preference