IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/26574.html
   My bibliography  Save this paper

Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities

Author

Listed:
  • Jessie Handbury

Abstract

This paper shows that the products and prices offered in markets are correlated with local income-specific tastes. To quantify the welfare impact of this variation, I calculate local price indexes micro-founded by a model of non-homothetic demand over thousands of grocery products. These indexes reveal large differences in how wealthy and poor households perceive the choice sets available in wealthy and poor cities. Relative to low-income households, high-income households enjoy 40 percent higher utility per dollar expenditure in wealthy cities, relative to poor cities. Similar patterns are observed across stores in different neighborhoods. Most of this variation is explained by differences in the product assortment offered, rather than the relative prices charged, by chains that operate in different markets.

Suggested Citation

  • Jessie Handbury, 2019. "Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities," NBER Working Papers 26574, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26574
    Note: ITI
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w26574.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. David Hummels & Volodymyr Lugovskyy, 2009. "International Pricing in a Generalized Model of Ideal Variety," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 3-33, February.
    2. David Atkin & Benjamin Faber & Thibault Fally & Marco Gonzalez-Navarro, 2024. "Measuring Welfare and Inequality with Incomplete Price Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(1), pages 419-475.
    3. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    4. repec:adr:anecst:y:1994:i:34:p:06 is not listed on IDEAS
    5. Mark Bils & Peter J. Klenow, 2001. "Quantifying Quality Growth," American Economic Review, American Economic Association, vol. 91(4), pages 1006-1030, September.
    6. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
    7. Dan Black & Natalia Kolesnikova & Lowell Taylor, 2009. "Earnings Functions When Wages and Prices Vary by Location," Journal of Labor Economics, University of Chicago Press, vol. 27(1), pages 21-47, January.
    8. Enrico Moretti, 2013. "Real Wage Inequality," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 65-103, January.
    9. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    10. Ingvild Almas, 2012. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food," American Economic Review, American Economic Association, vol. 102(2), pages 1093-1117, April.
    11. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    12. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
    13. Ina Simonovska, 2015. "Income Differences and Prices of Tradables: Insights from an Online Retailer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1612-1656.
    14. Benjamin Faber & Thibault Fally, 2022. "Firm Heterogeneity in Consumption Baskets: Evidence from Home and Store Scanner Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(3), pages 1420-1459.
    15. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    16. Slesnick, Daniel T., 2002. "Prices and Regional Variation in Welfare," Journal of Urban Economics, Elsevier, vol. 51(3), pages 446-468, May.
    17. Donald W. K. Andrews, 1999. "Consistent Moment Selection Procedures for Generalized Method of Moments Estimation," Econometrica, Econometric Society, vol. 67(3), pages 543-564, May.
    18. Nir Jaimovich & Sergio Rebelo & Arlene Wong & Miao Ben Zhang, 2019. "Trading Up and the Skill Premium," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 285-316, National Bureau of Economic Research, Inc.
    19. Pinjari, Abdul Rawoof & Bhat, Chandra, 2010. "A multiple discrete-continuous nested extreme value (MDCNEV) model: Formulation and application to non-worker activity time-use and timing behavior on weekdays," Transportation Research Part B: Methodological, Elsevier, vol. 44(4), pages 562-583, May.
    20. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, September.
    21. Angus Deaton & Olivier Dupriez, 2011. "Purchasing Power Parity Exchange Rates for the Global Poor," American Economic Journal: Applied Economics, American Economic Association, vol. 3(2), pages 137-166, April.
    22. Colin J. Hottman & Stephen J. Redding & David E. Weinstein, 2016. "Quantifying the Sources of Firm Heterogeneity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1291-1364.
    23. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
    24. David Albouy, 2009. "The Unequal Geographic Burden of Federal Taxation," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 635-667, August.
    25. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 489-530.
    26. Waldfogel, Joel, 2003. "Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated-Product Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 557-568, Autumn.
    27. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
    28. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
    29. Winkelried, D. & Smith, R.J., 2011. "Principal Components Instrumental Variable Estimation," Cambridge Working Papers in Economics 1119, Faculty of Economics, University of Cambridge.
    30. Mark Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
    31. Jonathan I. Dingel, 2017. "The Determinants of Quality Specialization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(4), pages 1551-1582.
    32. Andrews, Donald W. K. & Lu, Biao, 2001. "Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models," Journal of Econometrics, Elsevier, vol. 101(1), pages 123-164, March.
    33. Robert C. Feenstra & John Romalis, 2014. "International Prices and Endogenous Quality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 477-527.
    34. Raphael A. Auer, 2010. "Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?," Working Papers 2010-13, Swiss National Bank.
    35. repec:pri:rpdevs:deaton_price_indexes_inequality_and_the_measurement_of_world_poverty_aer. is not listed on IDEAS
    36. Bai, Jushan & Ng, Serena, 2010. "Instrumental Variable Estimation In A Data Rich Environment," Econometric Theory, Cambridge University Press, vol. 26(6), pages 1577-1606, December.
    37. Jean-Pierre H. Dubé & Jeremy T. Fox & Che-Lin Su, 2009. "Improving the Numerical Performance of BLP Static and Dynamic Discrete Choice Random Coefficients Demand Estimation," NBER Working Papers 14991, National Bureau of Economic Research, Inc.
    38. Victor Couture & Jessie Handbury, 2017. "Urban Revival in America, 2000 to 2010," NBER Working Papers 24084, National Bureau of Economic Research, Inc.
    39. Rebecca Diamond, 2016. "The Determinants and Welfare Implications of US Workers' Diverging Location Choices by Skill: 1980-2000," American Economic Review, American Economic Association, vol. 106(3), pages 479-524, March.
    40. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    41. Newey, Whitney K., 1984. "A method of moments interpretation of sequential estimators," Economics Letters, Elsevier, vol. 14(2-3), pages 201-206.
    42. Angus Deaton, 2010. "Price Indexes, Inequality, and the Measurement of World Poverty," American Economic Review, American Economic Association, vol. 100(1), pages 5-34, March.
    43. Jean-Pierre Dubé, 2004. "Multiple Discreteness and Product Differentiation: Demand for Carbonated Soft Drinks," Marketing Science, INFORMS, vol. 23(1), pages 66-81, September.
    44. repec:pri:rpdevs:presidential%20address%2017january%202010%20all.pdf is not listed on IDEAS
    45. Stefano DellaVigna & Matthew Gentzkow, 2019. "Uniform Pricing in U.S. Retail Chains," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 2011-2084.
    46. Christian Broda & Ephraim Leibtag & David E. Weinstein, 2009. "The Role of Prices in Measuring the Poor's Living Standards," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 77-97, Spring.
    47. David Albouy & Gabriel Ehrlich & Yingyi Liu, 2016. "Housing Demand, Cost-of-Living Inequality, and the Affordability Crisis," NBER Working Papers 22816, National Bureau of Economic Research, Inc.
    48. Colin J. Hottman & Ryan Monarch, 2018. "Estimating Unequal Gains across U.S. Consumers with Supplier Trade Data," International Finance Discussion Papers 1220, Board of Governors of the Federal Reserve System (U.S.).
    49. Anderson, Simon P. & De Palma, Andre & Thisse, Jacques-Francois, 1987. "The CES is a discrete choice model?," Economics Letters, Elsevier, vol. 24(2), pages 139-140.
    50. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    51. Igal Hendel, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 423-446.
    52. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jessie Handbury, 2021. "Are Poor Cities Cheap for Everyone? Non‐Homotheticity and the Cost of Living Across U.S. Cities," Econometrica, Econometric Society, vol. 89(6), pages 2679-2715, November.
    2. Jonathan I. Dingel, 2017. "The Determinants of Quality Specialization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(4), pages 1551-1582.
    3. Andrea Ciani, 2021. "Income inequality and the quality of imports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(2), pages 375-416, May.
    4. Benjamin Faber & Thibault Fally, 2022. "Firm Heterogeneity in Consumption Baskets: Evidence from Home and Store Scanner Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(3), pages 1420-1459.
    5. Ardelean, Adina & Lugovskyy, Volodymyr, 2019. "Tariffs, product quality, and the relative prices of durables: Evidence from 1989 to 2009 U.S. microdata," European Economic Review, Elsevier, vol. 114(C), pages 54-75.
    6. Jaimovich, Esteban & Madzharova, Boryana & Merella, Vincenzo, 2023. "Inside the white box: Unpacking the determinants of quality and vertical specialization," European Economic Review, Elsevier, vol. 152(C).
    7. Zhang, Qi, 2017. "The Balassa–Samuelson relationship: Services, manufacturing and product quality," Journal of International Economics, Elsevier, vol. 106(C), pages 55-82.
    8. Colicev, Anatoli & Hoste, Joris & Konings, Jozef, 2022. "The Impact of a Large Depreciation on the Cost of Living of Rich and Poor Consumers," CEPR Discussion Papers 16869, C.E.P.R. Discussion Papers.
    9. Hottman, Colin J. & Monarch, Ryan, 2020. "A matter of taste: Estimating import price inflation across U.S. income groups," Journal of International Economics, Elsevier, vol. 127(C).
    10. Chen, Natalie & Juvenal, Luciana, 2022. "Markups, quality, and trade costs," Journal of International Economics, Elsevier, vol. 137(C).
    11. Latzer, Hélène & Mayneris, Florian, 2021. "Average income, income inequality and export unit values," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 625-646.
    12. Vincenzo Merella & Josef Tauser, 2022. "Import Quality in Former Centrally Planned EU Countries," Carlo Alberto Notebooks 684 JEL Classification: F, Collegio Carlo Alberto.
    13. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, vol. 97(2), pages 376-391.
    14. Vandenbussche, Hylke & Aw-Roberts, Bee Yan & Lee, Yi, 2018. "Decomposing Firm-Product Appeal: How important is Consumer Taste?," CEPR Discussion Papers 12707, C.E.P.R. Discussion Papers.
    15. Dorothee Hillrichs & Gonzague Vannoorenberghe, 2021. "Recovering Within-Country Inequality From Trade Data," LIDAM Discussion Papers IRES 2021014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    16. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1450-1476.
    17. Adina Ardelean & Volodymyr Lugovskyy, 2015. "Technology, Trade, and Quality Slopes," CAEPR Working Papers 2015-004, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    18. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    19. Eddy Bekkers & Joseph Francois & Miriam Manchin, 2016. "Trade costs, quality and the skill premium," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(3), pages 1153-1178, August.
    20. Lisandra Flach & Eckhard Janeba, 2017. "Income inequality and export prices across countries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(1), pages 162-200, February.

    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:26574. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.