Envy and habits: Panel data estimates of interdependent preferences
Jose Maria Casado, Francisco Alvarez-Cuadrado, José M. Labeaga Azcona & Dhanoos Sutthiphisal
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 an 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 fourth of the weight placed in the
consumption of the reference group and more than one third of the weight
placed on the agent's past consumption.
Keywords: Consumption Externalities, Habit Formation, Panel Data.
JEL Classification: C23, D12, D91