DISSERTATION Titel der Dissertation Essays on Consumption Choice, Well-Being, and Pension Design Verfasser Stefan Zimmermann, B.Sc., M.Sc. angestrebter akademischer Grad Doctor of Philosophy (Ph.D.) Wien, Juni 2014 Studienkennzahl lt. Studienblatt: A 094 140 Dissertationsgebiet lt. Studienblatt: Volkswirtschaftslehre (Economics) Betreuerin / Betreuer: Univ.-Prof. Alejandro Cuñat, Ph.D. Univ.-Prof. Dipl.-Ing. Dr. Gerhard Sorger Contents List of Figures5 List of Tables5 Acknowledgments7 1 Introduction8 2 The Pursuit of Subjective Well-Being through Specific Consumption Choice 14 2.1 Introduction................................ 14 2.2 Literature Review and Hypotheses.................... 17 2.2.1 Measuring Subjective Well-Being: Validity and Reliability.... 17 2.2.2 Theories on Well-Being...................... 18 2.2.3 Previous Literature......................... 19 2.2.4 Assigning Consumption Categories to Consumption Types.... 21 2.2.5 Hypotheses............................. 23 2.3 Data.................................... 25 2.3.1 Dependent Variable: SWB..................... 25 2.3.2 Independent Variable: Consumption............... 27 2.3.3 Control Variables.......................... 28 2.3.4 Data Cleaning and Overview.................... 29 2.4 Econometric Model............................ 32 2.4.1 Linear Model............................ 32 2.4.2 Ordered Choice Model....................... 33 2.4.3 Potential Econometric Issues................... 35 2.4.4 Interpretation of Ordered Probit Coefficients........... 36 2.5 Results................................... 36 2.5.1 Main Results............................ 36 2.5.2 Robustness Checks......................... 43 2 2.5.2.1 Estimation Technique.................. 43 2.5.2.2 Consumption Ratios................... 43 2.5.2.3 Variation in Control Variables.............. 44 2.5.2.4 Categorization of Consumption Types.......... 44 2.5.3 Addressing Potential Endogeneity and Causal Inference...... 44 2.5.4 Comparison with Other Results.................. 48 2.6 Conclusion................................. 50 3 Relative Consumption: The Strength of Internal and External Habits 52 3.1 Introduction................................ 52 3.2 Model................................... 56 3.2.1 Household Preferences....................... 56 3.2.2 Econometric Model........................ 57 3.3 Data.................................... 59 3.3.1 Describing the Data Set...................... 59 3.3.2 Dependent Variable: Household Consumption Growth...... 59 3.3.3 Explanatory Variables of Focus.................. 59 3.3.4 Control Variables.......................... 60 3.3.5 Cleaning the Data Set....................... 60 3.3.6 Data Overview.......................... 61 3.4 Estimation Issues.............................. 63 3.5 Results................................... 65 3.5.1 Main Results............................ 65 3.5.2 Robustness Checks......................... 67 3.5.3 Comparison with Other Micro-Econometric Studies........ 67 3.5.4 Extensions............................. 69 3.5.4.1 External Habit: Keeping Up with the Joneses..... 69 3.5.4.2 Internal Habit: Long-Term Effect........... 71 3.6 Conclusion................................. 72 4 Life-Cycle Consumption, Asset Allocation, and Pension Design under Non-Standard Preferences 75 4.1 Introduction................................ 75 4.2 Model................................... 79 4.2.1 Demography............................ 80 4.2.2 Preferences............................. 80 4.2.3 Financial Income: Assets and Asset Returns........... 84 4.2.4 Non-Financial Income: Wages and Pension Benefits....... 84 3 4.2.4.1 Wages.......................... 84 4.2.4.2 Pension Benefits..................... 85 4.2.5 Constraints............................. 87 4.2.5.1 External Constraints................... 87 4.2.5.2 Internal Constraints................... 87 4.2.6 How To Solve the Model..................... 88 4.2.7 Analytical Solutions........................ 89 4.3 Parametrization.............................. 91 4.4 Simulation Results............................. 93 4.4.1 Positive Analysis: Empirical Regularities and Model Performance. 93 4.4.2 Normative Analysis: Evaluation of Pension Schemes....... 97 4.4.2.1 Construction of Life-Time Value............ 99 4.4.2.2 Comparison of Pension Schemes............ 100 4.4.3 Robustness............................. 103 4.4.4 Discussion............................. 104 4.5 Conclusion................................. 105 References 107 Appendices 123 A Second Chapter 123 A.1 Further Information............................ 123 A.2 Tables................................... 124 B Third Chapter 140 B.1 Literature.................................. 140 B.1.1 Theory............................... 140 B.1.2 Findings.............................. 142 B.2 Tables................................... 146 C Fourth Chapter 149 C.1 Further Information............................ 149 C.2 Tables and Figures............................. 151 D Copyright Declaration 155 E Summary: English and German Abstracts 156 4 F Curriculum Vitae 160 List of Figures 4.1 Baseline Simulation: Asset Allocation and Consumption......... 95 4.2 Baseline Simulation: Saving Rates, Equity Shares, and Consumption Ratios 96 C.1 The Shape of the Value Function..................... 154 List of Tables 2.1 Transition Matrices (Numbers in Percent)................. 26 2.2 Summary Statistics – Continuous Variables................ 30 2.3 Summary Statistics – Categorical Variables................ 31 2.4 Consumption and SWB – Ordered Probit................ 37 2.5 Basic vs. Conspicuous Consumption – Ordered Probit.......... 40 2.6 Materialistic vs. Experiential Consumption – Ordered Probit...... 41 2.7 Consumption Categories and SWB – Ordered Probit........... 41 2.8 Causality – Linear Fixed-Effects IV-Estimation.............. 46 2.9 Consumption Categories and SWB – Comparison to DeLeire and Kalil. 49 3.1 Summary Statistics............................ 62 3.2 Auto-Correlation in Consumption Growth................. 62 3.3 Strength of Internal and External Consumption Habits - Baseline Results 66 3.4 Estimate of the Internal Habit Coefficient................. 68 3.5 Two Measures for "Keeping Up with the Joneses" Preferences...... 70 3.6 Keeping Up with the Joneses Preferences - Extended Results...... 70 3.7 Long-Term Internal Habit Effect - Extended Results........... 72 5 4.1 Baseline Parameterization (Annual).................... 93 4.2 Stylized Facts and Model Performance.................. 98 4.3 Specific Points Along the German Income Distribution.......... 99 4.4 Life-Time Value for Different Pension Schemes: Non-Stochastic..... 101 4.5 Average Life-Time Value: 1000 Stochastic Simulations.......... 102 4.6 Minimum Life-Time Value: 1000 Stochastic Simulations......... 102 A.1 Linear Fixed-Effects Estimation...................... 124 A.2 Consumption Categories and SWB – Linear Fixed Effects........ 125 A.3 Consumption Ratios and SWB – Ordered Probit............. 126 A.4 Consumption Categories and SWB – Without Income Control...... 127 A.5 Consumption Categories and SWB – Without Subjective Health Controls 128 A.6 Basic vs. Conspicuous Consumption – Robustness of Categorization.. 129 A.7 Materialistic vs. Experiential Consumption – Robustness of Categorization 129 A.8 Different Domain Satisfactions – Ordered Probit............. 130 A.9 First-Stage Results of Fixed-Effects IV-Estimation............ 131 A.10 Causality of Basic and Conspicuous Consumption – Linear Fixed-Effects IV-Estimation............................... 133 A.11 First-Stage Results of Fixed-Effects IV-Estimation on Basic and Conspic- uous Consumption............................. 134 A.12 Basic and Conspicuous Consumption – Linear Fixed-Effects Estimation. 136 A.13 Causality of Materialistic and Experiential Consumption – Linear Fixed- Effects IV-Estimation........................... 136 A.14 First-Stage Results of Fixed-Effects IV-Estimation on Materialistic and Experiential Consumption......................... 137 A.15 Materialistic and Experiential Consumption – Linear Fixed-Effects Esti- mation................................... 139 B.1 Robustness – Gender Splitting...................... 146 B.2 Robustness – Including Higher Order Terms............... 147 B.3 Robustness – Income Growth and Squared Income Growth as Controls. 148 C.1 Calculation of the Effective Contribution Rate.............. 151 C.2 Population, Wage, and Deflator...................... 152 C.3 Old-Age Period Value For Different Pension Schemes: Non-Stochastic.. 152 C.4 Old-Age Period Value For Different Pension Schemes: Average..... 153 C.5 Old-Age Period Value For Different Pension Schemes: Minimum..... 153 6 Acknowledgments Writing this dissertation was an interesting, valuable, but also very challenging journey. In the process of completing this text, I learned to appreciate the rigorous work that many scientific scholars produce; an insight that cannot be gained without trying it for yourself. A scientific paper is never the work of the author alone. I borrowed from other people’s ideas, adopted their insights, and greatly benefited from constructive advice. Nonetheless, I am responsible for the way the text is put together. If there is anything incorrect or superficial, it is because I did not follow better advice. I want to thank my supervisor, Alejandro Cuñat, who supported and encouraged me. He also gave me the necessary freedom to pursue the topics that I am most passionate about. Your guidance made this a successful project. Moreover, I am thankful to my