Smooth it Like the ‘Joneses’? Estimating Peer-Group Effects in Intertemporal Consumption Choice

Authors


  •  Maurer gratefully acknowledges the hospitality of the Institute for Fiscal Studies in London as well as financial support provided by the European Community's Human Potential Programme through contract HPRN-CT-2002-00235. The views expressed in this article are those of the authors and should not be interpreted as the views of the International Monetary Fund. We thank Giuseppe Bertola, Charles Grant, Roger Klein and Frank Vella for very helpful discussion. Moreover, we have received valuable comments from two anonymous referees, Orazio Attanasio, Richard Blundell, Steven Bond, Martin Browning, Tullio Jappelli, Søren Leth-Petersen, Robert Waldman, Guglielmo Weber, Frank Windmeijer and seminar participants at the 3rd Villa Mondragone Workshop in Rome, the EEA Summer School at the Cemmap in London, the Zeuthen Workshop at the CAM Copenhagen, the Institute for Fiscal Studies in London, the Central European University in Budapest and the University of Bern. A previous version of this article, Maurer and Meier (2005), was circulated under the title: ‘Do the “Joneses” Really Matter? Peer-Group vs. Correlated Effects in Intertemporal Consumption Choice’. All remaining errors are our own responsibility.

Abstract

Recent theoretical contributions have suggested peer-group effects as a potential explanation for several puzzles in macroeconomics but their empirical relevance for intertemporal consumption choice is an open question. We derive an extension of the standard life-cycle model that allows for consumption externalities. In this framework, we propose a social multiplier approach to distinguish true externalities from merely correlated effects. Estimating our model using US panel data, we find strong predictable co-movement of household consumption within peer groups. Although much of this co-movement reflects correlated effects only, there is statistically significant evidence for moderate consumption externalities across several plausible peer-group specifications.

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