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Consumption, savings and wealth

Research articles · Aug 31, 2013

Modelling household spending using a random assignment scheme

Tony Lawson

Department of Sociology, University of Essex, England

Volume 6(2) Autumn 2013

Cite as: T. Lawson; 2013; Modelling household spending using a random assignment scheme; International Journal of Microsimulation; 6(2); 56–75. doi: 10.34196/ijm.00083

Abstract

Applied demand analysis is usually done by specifying some kind of econometric equation but there are some difficulties associated with this approach. These include the problem of modelling at a highly disaggregated level and the amount of data needed to estimate the parameters for the equations.

This paper examines the use of what are known as random assignment schemes as a way to model household expenditure. This approach is based on the idea of predicting the behavioural response of a microsimulation unit by finding a donor, which is in some sense similar to the receiving unit.

The paper begins with a brief review of econometric modelling. It then introduces the principles of random assignment schemes. These are expanded upon in an illustrative example to model the effect of changes in the level of income on household expenditure patterns. The model is then used as a platform to show how the random assignment scheme can be used to model a large number of goods, at the level of individual households.

This article contains 3 figures and 3 tables.

Figures

Figure 1. Share of expenditure (all households).
Figure 2. Share of expenditure (older households and families with young children).
Figure 3. Share of expenditure by quintile.

Tables

Table 1. Primary EFS expenditure categories.
Variable name EFS Household Expenditure Category Notes
P601t Food & non-alcoholic drinks
P602t Alcohol, Tobacco & Narcotics Alcohol to be consumed at home
P603t Clothing and Footwear
P604t Housing Fuel & Power Includes rent, maintenance of household, water and fuel bills.
Excludes mortgage costs
P605t Household Furnishings & equipment Includes carpets, curtains, household appliances, utensils and tools
P606t Health Prescriptions, glasses, dentist fees but not medical insurance
P607t Transport Purchase of vehicles, fuel, vehicle maintenance but not insurance
P608t Communications Mobile and fixed line telephone, postage but not internet subscription
P609t Recreation & Culture Television, computers, CDs, boats, caravans, pets, sports, holidays
P610t Education Course fees, school trips
P611t Restaurants & Hotels Includes takeaways, alcohol consumed outside the home and school meals
P612t Miscellaneous Includes insurance, jewellery, child care, fees, moving expenses
Type Description Definition
1 One person non-pensioner one person below pensionable age
2 One person pensioner one person of pensionable age
3 Couple with no children two adults
4 Family with children two adults + 1 or more children
5 Single parent one adult + 1 or more children
6 Other all other households
Table 2. Share of expenditure with increasing income (all households).
Expenditure Category Initial Share (%) Final Share (%) Shift in Budget Share (%) 95% Confidence Interval (+ −) α = 0.05, n = 3 Lower CI Upper CI
Transport 13.00 13.94 0.95 0.288 13.65 14.23
Education 1.48 2.31 0.82 0.242 2.07 2.55
Furniture 6.32 6.58 0.26 0.200 6.38 6.78
Miscellaneous 7.54 7.63 0.09 0.152 7.48 7.78
Health 1.24 1.31 0.07 0.033 1.28 1.34
Clothing 4.86 4.79 −0.08 0.095 4.70 4.89
Hotels 7.92 7.79 −0.13 0.007 7.78 7.80
Communication 2.46 2.1 −0.36 0.017 2.08 2.12
Recreation 12.26 11.89 −0.37 0.325 11.57 12.22
Alcohol 2.33 1.94 −0.39 0.039 1.90 1.98
Housing 9.94 8.92 −1.02 0.167 8.75 9.09
Food 9.81 8.14 −1.67 0.059 8.08 8.20

The expenditure shares to not add up to 100% because some spending goes to other items not included in these categories.