Modeling Consumer Behavior
Modeling Consumer Behavior
Consumers are represented by an aggregate demand function in many CGE models without allowing for demographic differences. Some allow for different demands by different household types but in a myopic context. This chapter describes a household model that is forward looking, where full wealth is allocated over time by households that are distinguished by demographic characteristics. Aggregate demand and labor supply is given in a closed form representation that accounts for heterogeneity in household behavior. The demand for goods and leisure is non-homothetic, allowing for more complex income effects of policy to be captured. We describe the econometric estimation of the parameters over 27 years of micro data from the Consumer Expenditure Survey and summarize the post-War U.S. aggregate consumption and labor supply patterns. We define equivalent variations that measure policy impacts on household welfare that are distinct for different household types and income levels. Social welfare in this framework cannot be represented by a simple equivalent variation that is derived from an aggregate utility function, we show how a social welfare function may be expressed in terms of our household welfare measures. There is a equity-efficiency tradeoff in the social welfare function.
Keywords: Household model, consumers, demographic characteristics, household heterogeneity, Consumer Expenditure Survey, econometric estimation, household welfare, social welfare, equivalent variation
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