Analyzing Consumption Behavior-Through Habits and Precautionary Motives

Abstract

This paper purposes to first compare and amalgamate existing literatures (both theoretical and empirical) on consumption patterns with respect to habit formation, precautionary motive, inter-temporal substitution motive and life cycle motive) and immigrant assimilation. Then, I use (combinations of) the best of these models to analyze the similarity (or the lack of) between the consumption patterns of immigrants and native born individuals while taking into consideration their similar/ dissimilar habit formation, precautionary motive, lifecycle motive and inter-temporal substitution motive. The paper is constructed as follows: it first provides applicable theories on immigrants and their impact on economies, habit formation (and its use in various topics), precautionary motive, and consumption (incorporating habits and prudence). This section culminates with the presentation of three testable models. The next section presents the econometric issues at hand: choice of functional form, choice of variables, construction of a quasi-panel, and method of estimation. This is then followed by a discussion of the regression results and concluding remarks.