Monday, October 12, 2015

Deaton's paradox and the dimension of consumption space

Today's economics Nobel brought up the "Deaton paradox" [pdf], that consumption is much smoother than income:
One of the most striking features of aggregate consumption behaviour is that aggregate consumption is smooth relative to aggregate income. Shifts in aggregate income are associated with relatively small shifts in aggregate consumption, and variations in consumption about trend are smaller than variations in income about trend.
You can read the paper for an explanation (or this paper for a different explanation).

However, in the information equilibrium view it is possible this is explained by the fact that there are more consumption dimensions (time periods and different options) than there are income dimensions. People change jobs less often than they buy food, and there are more distinguishable products out there than there are distinguishable jobs.

See here for how consumption smoothing is an emergent property of a representative agent.

At least, that's my first take upon hearing about it.

2 comments:

  1. Don't squirrels notoriously smooth consumption of food? They don't have a market economy, but I suspect that human consumption smoothing has evolutionary roots.

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    Replies
    1. Interestingly for evolution -- consumption smoothing using the model above could evolve from random behavior (random burying of nuts) rather than some kind of forward-looking faculty (burying nuts in order to retrieve them in the future).

      It gives a simple evolutionary mechanism for a complex behavior involving the future.

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