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Studies employing micro price data to examine the extent of international goods market integration tend to find that borders induce arbitrage-impeding transaction costs which contribute to segment national markets. Analyzing household scanner price data from the three euro area countries Belgium, Germany and Netherlands, we document that Belgian households living in the vicinity of the border to Netherlands pay almost 10% more for the same good as their Dutch counterparts. German consumers on the other hand face prices that are on average up to around 3% smaller than those in the neighboring Netherlands. Counterfactual evidence for within-country price discontinuities provides no evidence of any existing border effects. The induced costs of crossing national borders amount to at least 13%. We also find evidence on border discontinuities in various household preference characteristics (such as demand elasticities and goods valuation) and household shopping patterns such as shopping frequencies.
This paper investigates risk-taking in the liquid portfolios held by a large panel of Swedish twins. We document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth, leading to different risk sensitivities across investors. Human capital, which we estimate directly from individual labor income, also drives risk-taking positively, while internal habit and expenditure commitments tend to reduce it. Our micro findings lend strong support to decreasing relative risk aversion and habit formation preferences. Furthermore, heterogeneous risk sensitivities across investors help reconcile individual preferences with representative-agent models.
We estimate the degree of 'stickiness' in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.
We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence of habit formation, an impatient individual would prefer a decreasing consumption path over life. However, because of habit formation, a high initial consumption would lead to high required consumption in the future. To cover the future required consumption, wealth is set aside, but the necessary amount decreases with age which allows consumption to increase in the early part of life. At some age, the impatience outweighs the habit concerns so that consumption starts to decrease. We derive the optimal consumption strategy in closed form, deduce sufficient conditions for the presence of a consumption hump, and characterize the age at which the hump occurs. Numerical examples illustrate our findings. We show that our model calibrates well to U.S. consumption data from the Consumer Expenditure Survey.
We set up and solve a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. The model features habit formation for housing consumption, which leads to optimal decisions closer in line with empirical observations. Our model can explain (i) that stock investments are low or zero for many young agents and then gradually increasing over life, (ii) that the housing expenditure share is age- and wealth-dependent, (iii) that perishable consumption is more sensitive to wealth and income shocks than housing consumption, and (iv) that non-housing consumption is hump-shaped over life.