Envy and Habits: Panel Data Estimates of Interdependent Preferences

48 Pages Posted: 1 Mar 2012

See all articles by Francisco Alvarez-Cuadrado

Francisco Alvarez-Cuadrado

McGill University - Department of Economics

Jose Maria Casado

Banco de España

José M. Labeaga

IFS Spain; UNED

Dhanoos Sutthiphisal

Assumption University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2012

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

Suggested Citation

Alvarez-Cuadrado, Francisco and Casado, Jose Maria and Labeaga, Jose M. and Sutthiphisal, Dhanoos, Envy and Habits: Panel Data Estimates of Interdependent Preferences (March 1, 2012). Banco de Espana Working Paper No. 1213, Available at SSRN: https://ssrn.com/abstract=2014005 or http://dx.doi.org/10.2139/ssrn.2014005

Francisco Alvarez-Cuadrado (Contact Author)

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

Jose Maria Casado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Jose M. Labeaga

IFS Spain

Spain

UNED

Calle Senda del Rey, 11
Madrid, 28040
Spain

Dhanoos Sutthiphisal

Assumption University ( email )

Dept of Business Economics, Assumption University
Bangna Trad Rd, Km 26
Bang Sao Tong, Samut Prakarn 10540
Thailand

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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