Consumer Behavior

Source: Econometrica, Vol. 38, No. 4 (Jul., 1970), pp. 109-115

Published by: The Econometric Society
Stable URL: https://www.jstor.org/stable/1911592
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 CONSUMER BEHAVIOR 109

I. If x E b dX' and 4x' E X' such that x' <

The second example shows that in the private ownership economy it is possible
for the distortions between producer's and consumer's prices to be "too big."
Let X = El= l Xi, Y = .% 1 YJ, and co be the total endowment vector. Also let
p denote the vector of producer's prices, p(p) the vector of consumer prices,
11(p) = {ye Ylp*y = maxp y',y'I Y&peP} where P is the unit simplex,
H' [p(p), v] the closed upper halfspace of the hyperplane through v with normal
p(p), and V = b d(Y + w) r b dX. The following condition is a suitable restriction
on the size of the distortions:

II. If [7r(p)+w]nV=0 and (Y+w)nXcH+[p(p),v], ve[7r(p)+w]nV

then X c H+ [p(p), v].

Condition II says that, for a given p, if profit maximizing leads to a production y

whose value (at consumer's prices) p(p) * y is such that p(p) v = min p(p)*v',
v = y + co, v' (Y + co) r X, then v is a value minimizer over all aggregate
consumptions.
The principal theorem may be stated as:
If, in addition to the conditions of Debreu, conditions I and II hold, then there
exists an equilibrium for the private ownership economy with fixed tax-subsidy
distortions.
Condition I strengthens the restrictions on the economic environment con-
sidered by Debreu. What is generalized here is the class of market phenomena
considered.

CONSUMER BEHAVIOR

An Empirical Study of Revealed Inconsistent Preference, Georg Hasenkamp and

Anthony Y. C. Koo, Michigan State University

This study analyzes empirically the extent and nature of inconsistencies

(violations of the Strong Axiom of revealed preference), as observed in consumer
food purchases. A consumer unit is considered inconsistent if there exists at least
one commodity bundle bought in period k (qk), such that q1 Rq2;...; qk- Rqk
and qkRql, where qiRqj denotes the revealed preference relation between com-
modity bundles qi and qj (i # j), and reads "qi is revealed to be preferred over qj.
Such an inconsistency will be called a cycle in the preference structure.
To determine such cycles, we transformed the revealed preference relation over
all commodity bundles of thirteen four-week periods into a floolean matrix, B.
The typical element (bij) of B equals one if the consumer unit showed qiRq
otherwise the element is equal to zero. This matrix form makes the problem
of finding cycles one of directed graph theory which can be solved on a com-
puter.
Our data source is the Michigan State University Consumer Panel which
included about 250 families. These selected families made weekly detailed reports

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110 NORTH AMERICAN REGIONAL CONFERENCE

on their food purchases. The results of the study show the proportions of families
that have such cycles (inconsistencies) in their preference structure, the number of
cycles and some of their properties.

Measuring the Permanent Income of a Household: An Experiment in Methodology,

R. Ramanathan, University of California at San Diego

A widely used technique of estimating permanent income is to classify house-

holds into approximately homogeneous groups defined by characteristics such
as occupation, age and home-ownership, the number of classifications being
limited by the sample size. Such a procedure suffers from two weaknesses. First,
since the averages are based on current income no account is taken of expected
future receipts. Secondly, the permanent income of two households belonging to
the same group may differ because of factors other than those used in forming the
group. For example, between two plumbers within the same age group one may
have a working wife or a larger wealth and thus have different permanent incomes.
The present study suggests a method of correcting for these defects.
Based on income-age profiles from survey data and growth rates of earnings
from time series data a method is suggested to estimate expected future receipts.
These are discounted to obtain "pseudo" permanent income (YY*). Y - Y* includes
that part of permanent income accounted for by differences in wealth (w) and
number of earners (Ne). This is corrected as follows. First estimate

Y- Ys* = 7t1W + 72(Ne - 1) + U.

The corrected permanent income is then given by

y* = y* + AW + A2(Ne1)

Empirical results indicate that both from the poin

actual and estimated saving (or consumption) as well as the relative precision of
the regression coefficients, Yp yields better results than the common method of
using mean values. This conclusion is independent of the choice of variables used
to group households.

A "Kinked" Linear Expenditure System: An Application to Rural South Vietnamese

Households, Marjorie B. McElroy, Northwestern University

The recent availability of the comprehensive Rural Income and Expenditure

Sample Survey provides a unique opportunity to examine expenditure patterns
of traditional households in an underdeveloped nation. The data from a 1964
cross-section of 2910 rural South Vietnamese households contain detailed
information on wealth, income (including income-in-kind) and expenditures as

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 CONSUMER BEHAVIOR 111

well as on the age, sex, education and occupation of each household member.
Graphs of estimated linear expenditure functions stratified by income classes
showed large discontinuities at the boundaries of income groups and seldom
captured the overall pattern evidenced in scatter diagrams of commodity expendi-
tures against income. Further inspection of the scatters suggested a simple
continuous piecewise linear expenditure function with two segments. A theoretical
rationale for such a system was developed by piecing together two already
familiar functions: a generalization of the quadratic utility function and the
utility function underlying Stone's linear expenditure system. With some manipula-
tion, the "bliss point" of the former can be made to coincide in commodity space
with the "subsistence point" of the latter, and the resulting utility function is
defined on either side of the juncture. The corresponding expenditure functions
are continuous piecewise linear with two segments and a "kink" at the income
level corresponding to the point in commodity space where the utility functions
are joined.
The "kinked" linear expenditure system was estimated using an iterative
maximum likelihood procedure to locate the kink and thereby fix the estimates
of the remaining parameters. The results were plausible and systematically
differentiated the pattern of estimates on either side of the kink. For example,
incremental income below the kink was allocated primarily for basic housing
and staple foods whereas above the kink it was spent on durables, medical and
personal care, eating out, and alcoholic beverages.

A Limiting Functional Form for Market Demand Functions, James Ramsey,

Michigan State University

Assume that the ith individual's demand curve for some good expressed as a
function of own price is P = Gi(qi) where one assumes that the function Gi is
continuous on the right and is a monotonically non-increasing function. Under
the conditions to be given below it is shown that a limiting form for the market
demand curve as N, the number of individuals in the market, increases can be
obtained by taking the limit of the aggregation of the individual demand curves.
The limiting form is shown in equation (1):

(1) Pm = P*( 1i- ),

where Pm is market price, P* is supremum price, q is themarket quantity dem

at the price Pm5 and 4 is the normal density function with parameters Q a
If one lets fi = -dGi and one assumes that the variables qi and P h
usual properties and that individual demand functions are mutually independent,
then the following conditions ensure that the limiting form for the market demand

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 112 NORTH AMERICAN REGIONAL CONFERENCE

curve is as shown in (1):

(i) fiqi dqi = qi is finite,

(2) (ii) fi(qi _ -i)2 dqi = 2 is finite,

(iii) f ilqi- i dqi = w3 is finite, i = 1, ,. . ,N.

The economic interpretations of the conditions are given in the paper. The
properties of the function (1) are discussed and classes of demand functions which
do and do not meet the conditions of the problem are examined.
The paper is concluded with some discussion of estimation problems and an
indication of the possibility of obtaining estimates of the parameters of the market
relation without observing significant variations in price over time. This result
is achieved by combining cross-sectional and time series observations.

A True Price Index When the Consumer Saves, Malcolm Galatin, City College,
New York

The literature on the economic theory of index numbers has not considere
the savings made by a consumer. It would be incorrect to consider savings to b
any other good for the purpose of defining a true price index, for if this were
two related aspects of the consumer's behavior would be ignored: (i) that he has
made an intertemporal decision concerning his expenditure, and (ii) that his
intertemporal decisions depend partly on his expectations of significant variables,
especially prices.
It is the purpose of this paper to show how a true price index may be defined
when (i) and (ii) above are explicitly considered. First, a basic two period model is
constructed to show how the consumer decides to allocate his expenditure over
time. It is assumed that he knows income in both periods and prices in period 0,
and forms expectations of prices in period 1. The decisions he makes include his
savings for period 0. Secondly, it is shown how actual prices in period 1, which
differ from period 0 prices, change his level of intertemporal utility in relation to
his planned level and the level he would have attained had prices remained
constant. With this information a true price index is defined which is relevant for
the consumer.
Without knowledge of his single period and intertemporal utility functions of
the basic model, the true price index cannot be measured. However, several theorems
are proved which relate the true price index to the measurable Paasche and
Laspeyres' price indexes. These results enable us, in many situations, to place
limits on the size of the true index. As we would expect, these results differ from
those of the conventional theory. Finally, an example is constructed to show the
form of the true price index for known utility functions of the basic model.

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 CONSUMER BEHAVIOR 113

The Use of Probit-Regression for the Estimation of the Weights in a Constant

Utility Index Number, Mei-chu Wang Hsiao, New York University; Richard N.
Rosett, University of Rochester.

Using a method developed by A. Wald it is possible to derive a quadratic

approximation to a utility function from sets of Engel curves and a knowledge of
the prices under which they obtained. If linear regression methods are used to
estimate these Engel curves, undue weight may be given to the tastes of a few
households whose expenditures on unusual goods are large. If the purpose of
estimating the utility function is to construct a constant-utility price index, it is
preferable that the estimated utility function reflect the behavior of an average
household rather than reflect the average expenditure of a household.
It seems clear, for example, that if in a population of 1000 households, one
household spends $1000 on good A and the rest spend zero, while every family
spends $1 on good B, that a 10% change in the price of good A should affect the
index only a little, while a 10% change in the price of good B should affect it more.
If regression methods are used, both changes will have the same effect since the
estimated utility function will be that of a household that spends $1 on both
goods A and B. If probit-regression methods are used, the estimated utility function
will be that of a household that consumes a minute amount of good A and $1
worth of good B.
Data from the 1950 and 1960 BLS Budget Studies are employed to illustrate
the differences in the Engel curves that result from using the two different estima-
tion techniques.

The Demand for Consumer Durables and Economic Activity, Thomas D. Simpson,
Macalester College

We are gradually becoming aware of the importance of consumer durables.

In terms of gross capital formation, when new housing is included in the definition
of consumer durables, household capital formation has been about one and one-
half times as great as business capital formation. Moreover, as a cyclical matter,
consumer durables have been considerably more volatile than gross business
investment in plant and equipment. Thus a better understanding of the behavior
of the demand for consumer durables may help us gain further insight into the
capital formation process and may in addition help us isolate those factors causing
cyclical disturbances.
A basic model of consumer demand is discussed here which is applicable to
both durable and nondurable goods. This model's arguments are a budget or
scale variable, a relative price variable, and an interest rate; moreover, an
anticipated price enters as an argument in the demand for consumer durables.
The econometric model employed is an iterative maximum-likelihood model
which relates current purchases to lagged purchases and weighted first differences

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114 NORTH AMERICAN REGIONAL CONFERENCE

of the budget, relative price, and interest rate variables, where the weights depend
on the rate of depreciation, and the iterations are performed on the weights.
This model is then used in estimating demand functions for automobiles, new
housing, durables other than automobiles and new housing, and nondurables and
services.
Experiments were performed which used various notions of income and money
as the budget variable; The best performance was registered by permanent income,
calculated in the usual manner, with the monetary base a not too distant second.
A number of permanent income series were computed differing with respect to their
horizons and a test was performed to determine whether the same horizon exists
for all commodities. For nondurables and services and new housing a two and
one-half year horizon was found to exist, while for other consumer durables it
was found to be slightly longer, and for automobiles the horizon appears to be
considerably shorter.
The results from this study also suggest that consumers are quite responsive
to price changes; this is particularly true for other consumer durables, and to a
lesser extent it is true for nondurables and services and automobiles. Moreover,
the results suggest that consumer durables are considerably more responsive to
changes in interest rates than nondurables and services, although they appear to
respond with a greater lag.

A Simultaneous Model of the Demand for Consumers' Durable Goods and Con-
sumer Credit, Walter Nicholson, Amherst College

Previous studies of the demand for consumers' durable goods have either
tended to disregard the effects of consumer credit or have generally found credit
variables not to be statistically significant (for example see Suits and Sparks). On
the other hand, several microeconomic studies (e.g. Juster) seem to imply that
consumer credit is quite important to the consumer's decision. This paper argues
that previous macroeconomic studies have been essentially mis-specified and
develops a model in which current durables' expenditures depend on the con-
temporaneous credit flow (which is determined elsewhere within the model).
Credit and durables' purchase decisions are viewed as being made simultaneously.
This approach provides an alternative and perhaps more precise way of integrating
the real and monetary aspects of Durable Goods' demand.
This model is then fit to macroeconomic data for the period 1954.1-1967.4
using both Ordinary and Two Stage Least Squares. The statistical properties of
these estimates are quite good and the equations' predictive ability (for 1968) is
superior to several alternative models. Using the same basic model, several
possible specifications are examined and the demand for automobiles is examined
separately. By simulating the model over the period of estimation some con-
tentions about the effects of credit availability on aggregate demand are
examined.

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 CONSUMER BEHAVIOR 115

Short Run Changes in Consumer Credit: Evidence from a Panel Study, William C.
Dunkelberg, Stanford University; Frank P. Stafford, University of Michigan

Availability of two extensive interviews with 1921 U.S. families (one in

January 1967, the second in January 1968) provides excellent data for studying
consumer portfolio adjustments. Selecting the net change in installment debt
owed (extensions repayments) as the dependent variable in a stock adjustment
model, we identify annual movements toward equilibrium (adjustments and
cross-adjustments) in the portfolio, given disequilibrium in installment debt and
other stocks including household durables.
Our study is unique in several respects:

1. The data are from a national reinterview sample of U.S. families financed
by the Ford Foundation for the purpose of studying credit use and related port-
folio behavior.
2. Zellner has argued that "important in influencing labor force participation
may be deviations of actual stocks from desired levels, particularly as regards
durables and debt." We specify the expected level of earnings for the wife and
examine the impact of variations in the wife's earnings on debt change.
3. In addition to the assumption that the consumer has a desired level of debt,
we introduce the desired level of annual payments (relative to disposable income),
allowing for the limitation on overall liquidity of high monthly payments.

The model is estimated by two stage estimation techniques and is structured

as follows:

AD = ao + al(D* - Di1) + a2(H* - H1) + a3(A* - A_)

+ a4(AIDPY* - AIDPY-1) + a5(W* - W-1) + U.

AD = net change in installment debt during 1967

D = level of debt owed
H = value of durables
A = value of liquid assets
AIDP Y = ratio of annual debt payments to disposable income
W = level of wife's earnings

* denotes desired levels estimated in the first stage

denotes value at the beginning of the period.

Our findings include an estimated value of about 0.5 for a1 which contrasts
with Zellner's summary in which "the installment debt adjustment process seems,
..., to be independent of everything but the auto stock adjustment process....
These findings are hard to believe". We also find a relationship between the wife's
labor participation and subseq'uent adjustments in debt.

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