D12 - Consumer Economics: Empirical AnalysisReturn

We present a set of practical applications of the household sector stress testing approach used at the Czech National Bank. The aim is to test households' ability to repay their loans in the event of extremely adverse economic developments. Besides this, the household sector stress test methodology has so far been used for two other purposes: (i) to construct a simple reverse stress test and explore the sensitivity of Czech households to a rise in loan interest rates and a decline in income, and (ii) to provide some supportive evidence for the calibration of debt service-to-income limits.

This paper examines the influence of relative income on the consumption function, particularly the issue of the precise quantification of the relationship between the propensity to consume and the position of the household in the income distribution represented just by relative income. Mainstream theory of consumption, though it is aware of this effect, for its focus primarily on the aggregate consumption, it doesn't pay much attention to this. However, if it is possible to accurately describe and quantify this so-called relative income effect, it will mean a relevant contribution to the explanation of individual consumption patterns or consumption of income categories. The aim of this work is to find, describe and precisely quantify the impact of relative income on the average propensity to consume on the example of Czech households. To achieve this goal, we use a regression estimation of the dynamic panel using GMM, where the individual panels are set as income categories of households. The results achieved unambiguously confirm the validity of the initial assumption about the existence of functional dependence of the propensity to consume on the relative income and thus it fully supports the idea of interdependent concept of utility and consumption.

In the present study we analyze diversification of food consumption in Slovakia. Dietary diversity is a proxy for the quality of diet and it measures one aspect of household food and nutritional security. Using data from the Slovak Household Budget Survey, we estimate determinants of demand for food diversity by means of linear and quantile regressions. We measure food diversity by count measure of food items consumed during a specific time period and by Berry index. While demand for food diversity has been steadily increasing since 2004, economic crisis in 2009 slightly reduced the diversity of foodstuffs consumed by Slovak households. Estimated income elasticities are consistent with the applied theoretical framework and previous studies conducted in other countries. Furthermore, results from the quantile regression reveal that the estimated coefficients significantly differ across quantiles of the dependent variables' distribution. Results further indicate that Slovak households diversify their food consumption less during the first quarter of the year and in rural areas. Individual characteristics of the household head, such as education, age or gender significantly influence diverse food consumption too. Overall, an increasing demand for food diversity was observed between 2004 and 2010 which can imply an improved quality of diet and food security of Slovak households.

Price levels affect real incomes across countries and regions. We compare real incomes of workers and pensioners across 14 regions of the Czech Republic. We find that taking into account regional differences in price levels compresses the income differences between regions for private sector employees, but increases them for pensioners and some groups of public-sector employees. This result is strengthened when we employ microeconomic data to refl ect the education, occupations, age and gender of workers. Private-sector wages in Prague are 43% higher than in the rest of the country, but one half of this difference can be explained by Prague's higher price level and the other half by workers' characteristics. When we take these two factors into account, public-sector wages and pensions are the lowest in Prague. We discuss the benefi ts and costs of the government refl ecting the regional price levels in setting public-sector wages or pensions.

The article evaluates the distributional impacts of the value added tax changes in the Czech Republic using the Household Budget Survey, a representative sample of approximately 3000 households. It evaluates the impacts on the living standards both for the VAT reform that was actually approved in 2011, as well as for alternative reform proposals that were discussed during 2011 and that also considered a reduction in payroll tax rates. The estimates refl ect the recent empirical fi ndings about the incidence of consumption and payroll taxes. Unifying the VAT at a single tax rate has an almost proportional impact on the households from the 2nd to impact 10th income decile while having a disproportionately larger impact on the poorest decile. A reduction in the payroll tax would have reduced the progressivity of the tax system across the entire income range.

Transitivity and dominance are key concepts built deep into the fundaments of most economic models of decision-making. One of the arguments in favour of using the two concepts is that they are normative, i.e., symptomatic of perfect, rational decision-making. This paper describes several specific axioms stemming from these concepts and appearing in axiomatic models of decision-making, gives possible arguments speaking for or against the normativeness of a given concept and adds examples of empirically observed violations of the concept by human decision-making. In the conclusion, it offers an assessment of whether the use of transitivity and dominance in economic models of decision-making is justified or not.

This paper summarizes the major events in the recent history of modelling human decisions under risk. After presenting the basics of expected utility theory, the key pieces of evidence are described which showed that under certain circumstances, this theory is not descriptively valid. The most promising alternative, cumulative prospect theory, is then presented in some detail, including a brief discussion of how it avoids violations of stochastic dominance and how it explains the above evidence. It is pointed out that there are other empirical observations which cannot be explained by cumulative prospect theory either, so that a model which would explain all evidence on decisions under risk is still to be found.