Theory predicts that in markets with increasing returns, the number of differentiated products and resulting consumer satisfaction grow in market size. We document this phenomenon across 246 US radio markets. By a mechanism that we term 'preference externalities', an increase in the size of the...

This paper analyzes optimal portfolio choice and consumption with stochastic volatility in incomplete markets. Using the Duffie-Epstein (1992) formulation of recursive utility in continuous time, it shows that the optimal portfolio demand for stocks under stochastic volatility varies strongly...

The consumption value of a durable good diminishes as it ages due to physical deterioration and consumers' preference for the new. We develop a model of consumer specialization and trade in the market for used durables based on imperfect substitutability. Imperfect substitutability across...

The paper proposes an instrumental variables version of the Huber estimator as an alternative to the IV-Krasker Welsch estimator. The IV-Huber estimator is analytically and computationally much simpler than IV-Krasker Welsch. In the context of an empirical study of the importance of borrowing...

What model features and calibration strategies yield a large average marginal propensity to consume (MPC) in heterogeneous agent models? Through a systematic investigation of models with different preferences, dimensions of ex-ante heterogeneity, income processes and asset structure, we show...

Standard consumption models assume a notional consumption flow that does not distinguish between nondurable and durable consumption. Such notional-consumption models generate notional marginal propensities to consume (MPC). By contrast, empirical work and policy discussions often highlight...

This paper presents the results of an experimental study of the life cycle model in which subjects were asked to make preferred consumption choices under hypothetical life cycle economic conditions. The questions in the experiment are designed to test the model's assumption of rational choice...

This paper addresses two questions. First, what are the key factors that affect a consumer's lifetime budget constraint and how do they evolve over the lifecycle? Second, how do consumers respond to changes in these factors? We examine the permanent income hypothesis and the Keynesian...

For thirty years, it has been accepted that consumption is smooth because permanent income is smoother than measured income. This paper considers the evidence for the contrary position, that permanent income is in fact less smooth than measured income, so that the smoothness of consumption...

This paper characterizes empirically how government budget variables, such as spending, taxes, and deficits, affected private-sector consumption in the high-budget-deficit economy of Israel during the first half of the 1980s. The paper develops and estimates an intertemporal optimizing model of...