Habit Formation, Potential Liquidity Constraints and Consumer Behavior of Urban Households
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| Title | Habit Formation, Potential Liquidity Constraints and Consumer Behavior of Urban Households
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| Author | Hang Bin |
| Organization | Potential liquidity constraint, Habit formation, Income ranking, Consumption of urban households |
| Email | hb-1493@163.com |
| Key Words | Shanxi University of Finance and Economics |
| Abstract | Proceeding from China’s reality, this paper first derives the first order condition of intertemporial utility optimization and its corresponding consumption function under non-independent preference and liquidity constraint, then conducts an empirical study using China’s urban household survey data of 22 provinces and municipalities from 1992 to 2008, which is segmented into three income levels as the high, middle and low. The results indicate that consumption behavior varies among households with different income levels: 1. For high-income and middle-income households, previous period’s consumption has insignificant influence on their current consumption, whereas the habit formation hypothesis is supported by data of middle-income households. Specifically, income elasticity for the middle-income households has decreased by 10.58%, since the habit formation parameter reflects consumer’s cautious attitude to sharp fluctuation in consumption. 2. For high，middle and low-income households, expected consumption expenditure is an important explanatory variable, but potential liquidity constraint’s influence on low-income households is weaker.3. Demonstration effects are significant，regardless of household’s income level. |
| Serial Number | WP68 |
| Time | 2011-04-26 |
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