Measurement Error in Imputed Consumption

Posted: 24 May 2018

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

Lorenz Kueng

Northwestern University - Kellogg School of Management; University of Lugano - Faculty of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Michaela Pagel

University of California, Berkeley

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Date Written: May 15, 2018

Abstract

Because of limitations in survey-based measures of household consumption, a growing literature uses an alternative measure of consumption commonly referred to as `imputed consumption'. This approach utilizes annual snapshots of household income and wealth from administrative tax registries to calculate household consumption as the residual of the household budget constraint. In this paper we use transaction-level retail investment data to assess the measurement error that can result in imputed consumption due to intra-year changes in asset values and composition. We show that substantial discrepancies between imputed and actual spending can arise due to trading costs, asset distributions, variable trade timing, and volatile asset prices between two annual snapshots. While these errors tend to be quantitatively small and centered around zero on average, we demonstrate that they vary across individuals of different types and income levels and are highly correlated with the business cycle.

Keywords: Registry Data, Measurement Error, Retail Investors, Household Portfolios

JEL Classification: D12, D14, G11, H31

Suggested Citation

Baker, Scott R. and Kueng, Lorenz and Pagel, Michaela and Meyer, Steffen, Measurement Error in Imputed Consumption (May 15, 2018). Available at SSRN: https://ssrn.com/abstract=3179117

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

Lorenz Kueng (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
+1 (847) 491-7843 (Phone)
+1 (847) 491-5719 (Fax)

HOME PAGE: http://www.lorenzkueng.com

University of Lugano - Faculty of Economics ( email )

Via Giuseppe Buffi 13
CH-6900 Lugano, CH-6904
Switzerland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michaela Pagel

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

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