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Interdependent preferences: An econometric analysis

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~„: si "l ~1SCUSSIOri ,aàá y~~~ paper '. I'IUIIIIII11111111111111f II1~~INl~hu'A!I ~ ,~,~Q~j ,i ~"'OJQ~J , , No. 8954 INTERDEPENDENT PREFERENCES: AN ECONOMETRIC ANALYSIS by Arie Kapteyn, Sara van de Geer, Huib van de Stadt and Tom Wansbeek' '~ November, 1g89 INTERDEPENDENT PREFERENCES: AN ECONOMETRIC ANALYSI5 Arie Kapteynw~ wY` Sara van de Geer l www~ Huib van de Stadt rwrw~ Tom Wansbeek Tilburg University and CentER Centre for Mathematics and Computer Science, Amsterdam Netherlands Central Bureau of Statistics Groningen University and CentER Fellow Financial support by the Netherlands Organization for Scientific research is gratefully acknowledged. We thank Ton Barten, Wouter Keller, Peter Kooreman and Rob Alessie for valuable comments and Erik van Elderen for research assistance. INTERDEPENDENT PREFERENCES: AN ECONOMETRIC ANALYSIS Abstract The theoretical model of Gaertner (19~4) and Pollak (1976) to analyze interde- pendence of preferences in the Linear Expenditure System is estimated for a cross-section of households. The interdependence of consumption of different households has implications for the stochastic structure of the model and for the identifiability of its parameters. Both aspects are dealth with. The empirical results indlcate a significant role played by the inter- dependence of preferences. One of its implications is that for a household, predictions of the effects of changes in exogenous variables differ according to whether the exogenous variable only changes for this household or for all households jointly. 1 1. Introduction In his pioneering study, Duesenberry (1949) gave several kinds of evidence based on aggregate data to indicate the importance of preference interdepen- dence for the explanation of consumer behavior. At about the same time Leiben- stein (1950) extensively discussed various types of interdependencies in con- sumption behavior of individuals. Of course, these two authors were not the first ones to discuss pr

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