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INTERTEMPORAL CHOICE AND THE CROSS-SECTIONAL VARIANCE OF MARGINAL UTILITY: Measures of marginal utility

cex_expenditures
In all three surveys we define consumption as total household expenditure on non-durable goods. This excludes expenditures on durable goods, health, education and housing, except that in the case of the SHIW, where it excludes durable expenditure only. Current values are transformed into constant values using a consumer price index. As discussed in Section 2, we use three different approximations of the marginal utility of consumption. The first is simply the logarithm of consumption. The second is the log of consumption per adult equivalent. The third filters the consumption data using the preference parameters estimated by Attanasio and Weber (1993) for the UK and by Attanasio and Weber (1995) for the US. The definition of adult equivalent used in the second procedure assigns a weight of 1 to the first adult, 0.8 to any additional adult and 0.25 to any child. To compute the expressions in equation (10) it is also necessary to know the value of the elasticity of intertemporal substitution. Those reported in the tables below correspond to a value of о of 0.8. We experimented with alternative specifications, both for the definition of adult equivalents and for the assumption about the elasticity of intertemporal substitution, obtaining very similar results.

The SHIW allows a straightforward estimation of the variance of annual log consumption. The sample size and structure of the FES and CEX allow us to construct quarterly data. The results for the UK and the US using annual observations are similar to those presented below and can thus be omitted for brevity. The only notable difference is that the standard errors for the US based on annual observations are slightly larger than those based on quarterly observations.

This post was written by , posted on June 5, 2014 Thursday at 2:45 pm