The Saturation of Spending Diversity and the Truth about Mr Brown and Mrs Jones

Christian Kiedaisch, Andreas Chai, Nicholas Rohde

Research output: Working paperDiscussion paper

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Abstract

Several studies find that household expenditure in rich countries is spread more
evenly across spending categories, relative to household expenditure in poor countries (Clements et al., 2006). We argue that this result is likely due to aggregation. Using highly disaggregated UK household level spending data, we show that the spending diversity of households only rises up to a certain income level and then starts to decline, as households concentrate more of their spending on particular expenditure categories. As these categories in which richer households concentrate their spending differ across households, the average spending diversity of the population can nevertheless always rise in income. We build a model that can explain these observed patterns. Using this model, we show that ignoring even small degrees of preference heterogeneity across households and focusing on a model with representative households can lead to a substantial underestimation of the value of product variety.
Original languageEnglish
Number of pages55
Publication statusUnpublished - 10 Mar 2020

Keywords

  • demand for variety
  • Engel's law
  • spending diversity

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