Smooth It Like the 'Joneses'? Estimating Peer-Group Effects in Intertemporal Consumption Choice
University of Mannheim
International Monetary Fund (IMF)
September 1, 2007
The Economic Journal, Vol. 118, No. 527, pp. 454-476, February 2008
MEA Discussion Paper No. 167-08
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.
Number of Pages in PDF File: 46
JEL Classification: C23, D12, D91, Z13
Date posted: August 11, 2009
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