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Intertemporal Two-stage Budgeting: Implications for Consumer Demands and Consumption

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  • Kim, H. Youn
  • McLaren, Keith R.

Abstract

Consumer demands and consumption, though seemingly disjoint, are inextricably linked together via intertemporal two-stage budgeting, and cannot be separated. This paper elucidates this budgeting procedure with an illustration using the Linear Expenditure System, and evaluates the traditional analysis of consumer behavior that treats them as independent. We find that the dichotomous treatment of consumption expenditure and relative commodity prices in the traditional analysis creates a bias in the estimation of consumer demands and consumption. We argue that a proper understanding of consumer behavior entails an integration of consumer demands and consumption within a unifying framework, which can be achieved by utilizing the intertemporal two-stage budgeting procedure.

Suggested Citation

  • Kim, H. Youn & McLaren, Keith R., 2024. "Intertemporal Two-stage Budgeting: Implications for Consumer Demands and Consumption," Research in Economics, Elsevier, vol. 78(1), pages 25-36.
    • Handle: RePEc:eee:reecon:v:78:y:2024:i:1:p:25-36
    DOI: 10.1016/j.rie.2024.01.007
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    More about this item

    Keywords

    Indirect utility function; Homothetic preferences; Intertemporal optimization; CRRA utility; Intertemporal substitution;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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