Do consumer s tastes differ final 1.7. - HEC

More documents

Recommendations

Info

D O C ONSUMER’ S T ASTES D IFFER? model does not contain any similar terms. On the other hand, the difference in the choice of countries needs to be considered. In the case of re-estimating model 3 with the constant terms suppressed in order to ensure a better comparison, results show closer estimates but differences still remain. Therefore Selvanathan continues to use model 3 with constant terms built-in, since first, more than seventy-five percent of its estimates are significant and second, model 3 including the constants tends to be more compatible with the data than if they are suppressed. As models 1 and 2 can be expressed by model 3, Selvanathan concentrates on models 3 and 4 in his conclusion. The two models suggest that consumers in different countries are the same in the sense that income coefficients and income flexibility take common values internationally. However, consumers may be country specific as the constant term in model 3 varies over countries, accounting for differences in non-economic factors, and as the error terms in both models take different values across countries to allow for unexplained random factors. Goodness of Fit of the four models First, the information inaccuracy is calculated as a relation between the observed value of the budget share of commodity i in year t in country c and the predicted budget share implied by the demand model. It is equal to zero if the fit of the model is perfect and increases as the fit becomes worse. A comparison of all four models exposes that except for some small differences the countries have the same rankings. In other words, the same general patterns emerge whether or not Selvanathan specifies the parameters of the demand equations to be the same across countries. Therefore he assumes cross-country similarities of taste. When taking a closer look at the results, models 2 and 4 show higher inaccuracies than models 1 and 3; interestingly, although using a far more diversified country sample, Theil’s model (4) performs much better than model 2, which uses only OECD countries. The pooled model (3) is in fact almost as good as the individual country model (1) when comparing the GDP-weighted and unweighted means. The increase in inaccuracy with the best result for model 1 with inaccuracy increasing over models 3 and 4 to model 2 is mainly due to an increase of restrictions. Second, the root-mean squared (RMS) percentage prediction error can be analysed for further information, giving 100 times the square root of the budget-share-weighted mean of the squared relative prediction errors of the budget share. Calculating the RMS error for the models, Selvanathan finds 1.93 percent for the individual country model and 2.02 percent for the pooled model, giving a deterioration in the quality of the predictions when tastes are taken to be identical of 2.02 – 1.93 = 0.09 percentage points. As this variation is quite modest, it can be taken as another indicator for tastes being relatively similar across countries. Again, the results obtained for the two other models are higher. Analysing the lack of fit of the models, no dominating commodity is found. Third, the influence of the weighing scheme needs to be tested. It can be stated that larger countries have better fitting demand equations than the smaller ones, so that a higher weight of a country leads to a lower inaccuracy for its data. Therefore the question is risen of how much the result of similarity actually depends on the fact that better fitting countries obtain a higher weight? When excluding either large or small countries regarding total GDP, weights do not have a substantial influence on the results, thus the weighting scheme plays little or no role in the conclusion that tastes are not too dissimilar internationally. Do the Demand Parameters Depend on Income and Prices? As discussed in the previous paragraph, demand parameters do not seem to vary across countries. In order to test whether parameters change internationally in response to systematic differences regarding per capita GDP and relative prices, considered as economic characteristics’ variables by Selvanathan, an estimation by weighted least squares is conducted. The F-values are insignificant indicating that income coefficients are not related to income and relative prices. Also the effect of income on income flexibility regarding the values of the individual country model analysed by an B EKE T INNEBERG 7 19 MARCH 2003
D O C ONSUMER’ S T ASTES D IFFER? estimation by weighted least squares results in insignificant F-values depicting that income flexibility is independent of real income. Consequently, income coefficients and income flexibility seem to be unrelated to income and prices. Additionally, the constancy of these coefficients suggests that they are fundamental parameters characterizing tastes, which are invariant in a wide variety of economic circumstances. Another indication of consumers’ similarities on an international level is the fact that ninety-five percent of the parameter estimates of model 1 lie within the two-standard-error bands of the estimates of models 2 and 3. The criterion of information inaccuracy provides good results for model 3, pointing in favour of consumers being not too dissimilar. Nevertheless, it needs to be clarified that the data relates to broad aggregates comprising ten commodity groups so that there might be more disparities in taste for smaller aggregates. Another aspect, which needs to be considered, is the inclusion of unexplained factors like the constant terms. The assumption of similar tastes has been taken under exclusion of the influence of these terms, which could in fact be culture, tradition, habits or even specific preferences. Therefore, unexplained factors need to be used with precaution in order not to influence the reliability of the model’s results. Clements/Chen: Fundamental Similarities in Consumer Behaviour7 The authors want to attack the question why for example Asians eat rice and Europeans eat bread, whether this is due to a different price level, to different tastes or to tradition. The main difference to the models used by Selvanathan is that Clements and Chen compare two groups of countries: 18 OECD countries with 13 least developed countries (LDC). The commodities used are food, clothing, housing, durables, medicine, transport, recreation, and “other”, using the same categories except beverages and education compared to Selvanathan. Forces, which could blur the differences, are that barriers to international trade have fallen, e.g. transport and communication costs, leading to an explosion of world trade, international travel and migration, supporting the tendency towards homogeneity of consumption patterns in different countries. The consumption patterns in the group of OECD countries are compared with those in developing countries. OECD countries spend relatively less on food (29,59% < 40,44%); these “savings” are redistributed to housing and transport. An analysis of the Divisia price and quantity variance, which measure cross commodity dispersion, shows that first, the coefficients of variation are fairly similar in the OECD and LDC countries and second, the price-quantity correlation is almost exactly the same. These findings point to important international similarities Constancy of tastes Utility maximisation theory usually postulates that tastes are fixed, so that the only observable variables, income and prices, explain consumption. The hypothesis of stable preferences is tested by comparing estimates of demand equations for the OECD with those for the LDCs. Autonomous trends are observed to be fairly close in the two groups of countries, except for transport. The income elasticity for food is lower in the OECD and for transport a significant difference has been found. The remaining six commodities show fairly similar elasticities. Regarding price elasticity, only the differences for clothing and transport are highly significant. The data regarding transport points to the possibility of fundamental differences between the OECD and LDC countries, otherwise a surprising degree of similarity in consumer behaviour across widely differing groups of countries can be suspected. If observable differences in income and prices are controlled for, then consumption patterns are more or less the same worldwide; at least at a first approximation differences in taste appear to play no role. This finding is subject to two qualifications: first, the commodities analysed are broad aggregates and 7 This paragraph summarizes Clement, K.W. and D. Chen, Fundamental similarities in consumer behaviour, Applied economics, 1996, 28, 747-757 B EKE T INNEBERG 8 19 MARCH 2003
Page 1 and 2: Beke Tinneberg Macroeconomic Modell
Page 3 and 4: Tastes are the same. Are tastes rea
Page 5 and 6: D O C ONSUMER’ S T ASTES D IFFER?
Page 7: D O C ONSUMER’ S T ASTES D IFFER?
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
Page 23: D O C ONSUMER’ S T ASTES D IFFER?

Do consumer s tastes differ final 1.7. - HEC

Create successful ePaper yourself

Delete template?

Save as template?