Heterogeneity in Consumer Demands and the Income Effect: Evidence from Panel Data

Authors

  • Mette Christensen

    1. Institute for Urban Economics, DK-1061 Copenhagen, Denmark
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    • I wish to thank two anonymous referees for their helpful comments. I am also grateful for comments from Richard Blundell, Martin Browning, Lola Collado, Tom Crossley, Mette Ejrnaes, Birgit Grodal, and José M. Labeaga. I thank the European Community's Human Potential Program under contract HPRN-CT-2002–00235 [AGE] for financial assistance.


Abstract

This paper uses unique Spanish panel data on household expenditures to test whether unobservable heterogeneity in household demands (taste, etc.) is correlated with total expenditures (income). The main finding is that tastes are indeed correlated with income for about half of the goods considered, implying that cross-sectional estimates of income elasticities for these goods are biased. The goods are the following: food eaten outside home, alcohol and tobacco, transportation, and energy. The elasticity of alcohol and tobacco is more than halved when taking unobserved heterogeneity into account. For transportation, the bias is sufficiently large to misclassify the good as a luxury.

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