Series: Working Papers. 1213.
Author: Francisco Alvarez Cuadrado, Jose Maria Casado, Jose Maria Labeaga and Dhanoos Sutthiphisal.
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Abstract
We estimate the importance of preference interdependence from consumption choices. Our
strategy follows the literature that tests the constraints imposed by optimality in the evolution
of individual consumption. We derive a Euler equation from a preference specification that
allows for non-separabilities across households and across time. The introduction of habits
and envy places additional restrictions on the evolution of the optimal consumption path.
We use a unique data set that follows a sample of 3,200 households for up to eight
consecutive quarters to test these restrictions. Our estimates suggest that, if one defines
utility over consumption services, a large fraction of these services is relative, with one-quarter
of the weight placed in the consumption of the reference group and more than one-third of
the weight placed in the agent’s past consumption.