Do consumer s tastes differ final 1.7. - HEC

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D O C ONSUMER’ S T ASTES D IFFER? second, the analysis deals with groups of countries. Nevertheless, it does not seem to matter, how rich and poor countries are defined, and the lack of systematic differences in demand parameters across countries also seems to be quite robust. The authors are therefore confident that the results are not just an artefact of the grouping of countries into OECD and LDC. Food Consumption In most countries, food dominates the budget of all consumers (30% OECD, 40% LDC) 8 , giving food the position of being the largest single commodity and thus the most important one. Therefore Clements and Chen conduct an analysis of 43 countries and time-periods 9 restricted to the commodity food. As a first analysis, the Working’s model is discussed 10 : w = α+ βlog M The scatterplot in figure 3 reveals Zimbabwe as an outsider. For the following analyses, the authors omit Zimbabwe. Seen the differences among the 42 countries, the R² associated to the equation is impressingly high with a value of 0.84. A re-estimation allowing for heteroscedasticity does not change the results appreciably. Second, the authors generalize the above equation to obtain A Box-Cox-transformation of income with the parameter ë has been used. λ λ − 1 = λ M M A Box-Cox Transformation is a transformation, which depends on a parameter, which can be estimated from data and is used for the specification and the choice of a function of econometric equations of models. It contains the linear and the logarithmic regression models as particular cases. Clements and Chen consider 4 special cases: first, the case of ë striving towards zero when the generalisation becomes Working’s model, second, the case of ë = -1, leading to the equation of the Linear Expenditure System (LES), third, ë = 1 refers to the equation equivalent to the quadratic expenditure system11 , and fourth, ë = -2 implies that expenditure on food is homogeneously linear in income and it is reciprocal. All four models have similar values for è 12 Figure 3 , except for the linear reciprocal model with a negative result for è, implying that food is an inferior good leading to the conclusion that model 4 is implausible. As a third analysis, the authors test, whether the four special cases of the model lead to a significant reduction of goodness-of-fit by a likelihood ratio test with maximum likelihood estimate, when ë is treated as an unknown variable. The test statistics follow an asymptotic ÷² distribution with one degree of freedom. All except one are significant (Working’s model = 0,42) and are rejected due to 8 the difference can be explained by the strong version of Engel’s law: when income doubles, the food budget sahre declines by 10 percentage points (Theil et al. (1989)) 9 USA, Switzerland, Canada, USA*, Australia, Sweden, Denmark, France, Norway, UK, Germany, Japan, Israel, Italy, Belgium, Austria, Australia*, Hong Kong, Sweden, Netherlands, Finland, Iceland, UK*, Singapore, Spain, Mexico, Israel*, Italy*, Puerto Rico, Malta, Puerto Rico*, Ireland, South Africa, Colombia, Taiwan, Korea, Greece, Panama, Thailand, Sri Lanka, Zimbabwe, Thailand*, Korea*, an asterix (*) indicating a second period for a country 10 w = budget share of food, M = per capita GDP 11 Pollak and Wales (1978) , the authors inspired Selvanathan to conduct his analysis, as they rejected H° of identical tastes with this model 12 è = marginal share of the price and quantity of food consumed w = γ + δM B EKE T INNEBERG 9 19 MARCH 2003 (λ )
D O C ONSUMER’ S T ASTES D IFFER? significant ÷² values. Clements and Chen are unable to reject the Working’s model, it can be therefore seen as dominant and additionally it is not significantly different from the more general Box-Cox-case. A possible defect of the Working’s model is that the budget share is a linear function of the logarithm of income so that the predicted budget share can fall outside the [0,1] interval for sufficiently high or low levels of income. Food income elasticity Clements and Chen then discuss how food elasticity changes with income. The Working’s model’s food income elasticity agrees with intuition. The elasticity ranks from 0.8 for the poorest country (Korea) to 0.2 for the richest (USA), with an average income elasticity for food of the OECD countries being smaller than of the LDC. For an estimation by least squares (model 2) however, the elasticities move in the wrong direction, in some cases an elasticity for rich countries of equal or higher than one has been found, indicating that food is a luxury. For the quadratic model (model 3), elasticities decrease too much with income so that food should be considered as an inferior for the six richest countries. As for the last two models, the change in value of the food elasticities are properties of the underlying models and not data dependent, they must both be considered as implausible models. In the last paragraph of their article, the authors find a “striking empirical regularity in the food price elasticity of demand” 13 after having compared the Frisch, Slutzky and Cournot own-price elasticities. As a conclusion of their research, Clements and Chen find that differences in price and income largely explain differences in consumption patterns. 13 p.755, Clements and Chen (1996) B EKE T INNEBERG 10 19 MARCH 2003
Page 1 and 2: Beke Tinneberg Macroeconomic Modell
Page 3 and 4: Tastes are the same. Are tastes rea
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Page 13 and 14: G.S. Becker: Accounting for Tastes
Page 17 and 18: Preference formation D O C ONSUMER
Page 19 and 20: Comparing the two countries, the av
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