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American Economic Review Vol. 106 No. 12 2016

Income-Induced Expenditure Switching

Rudolfs Bems1; Julian di Giovanni2

1 Graduate School of Public Policy, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033 Japan (e-mail: ) · 2 Department of Economics and Business, Universitat Pompeu Fabra Ramon Trias Fargas 25-27, Barcelona 08005, Spain, ICREA, Barcelona GSE, CREI, and CEPR (e-mail: )

Abstract

This paper shows that an income effect can drive expenditure switching between domestic and imported goods. We use a unique Latvian scanner-level dataset, covering the 2008–2009 crisis, to document several empirical findings. First, expenditure switching accounted for one-third of the fall in imports, and took place within narrowly defined product groups. Second, there was no corresponding within-group change in relative prices. Third, consumers substituted from expensive imports to cheaper domestic alternatives. These findings motivate us to estimate a model of nonhomothetic consumer demand, which explains two-thirds of the observed expenditure switching. Estimated switching is driven by income, not changes in relative prices.

DOI
10.1257/aer.20160251
Volume
106
Issue
12
Pages
3898-3931
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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