Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living across U.S. Cities

105 Pages Posted: 24 Dec 2019 Last revised: 4 Jan 2020

See all articles by Jessie Handbury

Jessie Handbury

University of Pennsylvania, The Wharton School

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Date Written: December 2019

Abstract

This paper shows that the products and prices offered in markets are correlated with local income-specific tastes. To quantify the welfare impact of this variation, I calculate local price indexes micro-founded by a model of non-homothetic demand over thousands of grocery products. These indexes reveal large differences in how wealthy and poor households perceive the choice sets available in wealthy and poor cities. Relative to low-income households, high-income households enjoy 40 percent higher utility per dollar expenditure in wealthy cities, relative to poor cities. Similar patterns are observed across stores in different neighborhoods. Most of this variation is explained by differences in the product assortment offered, rather than the relative prices charged, by chains that operate in different markets.

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Suggested Citation

Handbury, Jessie, Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living across U.S. Cities (December 2019). NBER Working Paper No. w26574. Available at SSRN: https://ssrn.com/abstract=3508553

Jessie Handbury (Contact Author)

University of Pennsylvania, The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

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