Long Term Effects of Experience During Youth: Evidence from Consumption in China

Abstract

We test for the long-term effects of experience during youth on consumption in nontraditional taste-forming categories. A unique dataset that tracks individuals over twenty years from 1992-2011, residing in nine Chinese provinces that vary widely in both income levels and rate of economic growth, helps us identify cohort and intra-cohort “prosperity-inyouth” (PIY) effects on consumption. We first demonstrate that non-traditional category consumption increases strongly among cohorts that entered adulthood during China’s boom years. We then show evidence of the intra-cohort PIY effect, controlling for individual level experience by leveraging the heterogeneity in the timing and rate of growth in prosperity across Chinese provinces. We find that the PIY effect has two dimensions - a direct effect of one’s own prosperity and an indirect effect of the prosperity of one’s province during youth. The indirect effects suggest that norms and aspirations created by the consumption of nontraditional categories by the surrounding rich during one’s youth have significant impact on long-term consumption - almost the same magnitude as the direct effect. We conduct a large number of robustness checks; in particular, we rule out potential supply side and attitude based explanations for the PIY effect. Our results imply that segmentation and consumption forecasts based on birth cohorts and experience of prosperity can be effective for taste forming non-traditional products in emerging markets.

Keywords: Cohort effects, Lifecycle effects, Emerging markets, China, Prosperity in youth, Impressionable years hypothesis, Long-term effects

JEL Classification: M310, D120, F610