Regional differences in urban residents' consumption behaviour in China: from the perspective of the habit formation time effect

This study constructs a panel extended linear expenditure system (ELES) model that includes the theory of internal habit formation and expands the theoretical connotation of the original model. It also decomposes the dynamic evolution characteristics of Chinese urban residents' psychological and physiological needs among various consumption expenditures. It explains the partial causes of the time effect in the panel ELES model from consumer behaviour. We have obtained the following innovative conclusions after the empirical analysis of urban residents’ consumption behaviour in different regions of China. First, urban residents have habit formation effects on seven types of consumption expenditure. Second, the timeliness of the psychological needs of various commodity expenditures differs between the eastern and mid-western region of China, and this difference has expanded since 2013. The COVID-19 pandemic has reduced the psychological needs for various commodity expenditures while having little impact on physiological needs. Finally, the study puts forward some policy recommendations, such as tapping the potential of commodity consumption with psychological needs growth, further enhance the cultivation of low-income people's consumption in the mid-western region, and implementing more detailed consumption supports with different regions' consumption preferences.