Several cross country studies find that rising household income leads to consumption spending being spread more evenly across different spending categories (Clements et al., 2006). We argue that this result is likely due to aggregation. Using more 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 that differ across households. It is precisely because of this growing heterogeneity of spending pattern on the household level that the average spending diversity of the population can nevertheless always rise in income. We build a model to capture this observed pattern and use it to show that ignoring preference heterogeneity across households and focusing on a model with representative households leads to an underestimation of the value of product variety.
"The Saturation of Spending Diversity and the Truth about Mr Brown and Mrs Jones" (Christian Kiedaisch, joint with Andreas Chai and Nicholas Rohde).
Photo credits:
"The New Fred Meyer on Interstate on Lombard"
(7404 N Interstate Ave, Portland, OR 97217), wikimedia.
