Envy and Habits: Panel Data Estimates of Interdependent Preferences

Abstract

We estimate the importance of preference interdependence from consumption choices. Our strategy follows the literature that tests the constraints imposed by optimality in the evolution of individual consumption. We derive a Euler equation from a preference specification that allows for non-separabilities across households and across time. The introduction of habits and envy places additional restrictions on the evolution of the optimal consumption path. We use a unique data set that follows a sample of 3,200 households for up to eight consecutive quarters to test these restrictions. Our estimates suggest that, if one defines utility over consumption services, a large fraction of these services is relative, with one-quarter of the weight placed in the consumption of the reference group and more than one-third of the weight placed in the agent’s past consumption.

Keywords: Consumption externalities, habit formation, envy, panel data

JEL Classification: C23, D12, D91