On allowing endogenous minimum consumption bounds in the Multiple Discrete Continuous Choice Model: An application to expenditure patterns

Abstract

In this study, we develop a novel econometric framework that allows for endogenously estimating minimum goods amounts, and their subsequent impact on individuals’ multiple discrete/continuous consumption choices. To do so, we pair a censored Tobit model (Tobin, 1958) with a Multiple Discrete Continuous Extreme Value (MDCEV) model (Bhat, 2005; 2008), with the former being employed to identify lower bounds on consumptions based upon the demographic characteristics of decision-makers. The model proposed is applied to a web-based survey designed to examine monthly expenditure decisions for the following categories: entertainment, household bills, miscellaneous costs, rent/mortgage payments, shopping, transport, childcare and other unspecified expenditure. In addition to providing information on actual expenses, recruited respondents were also asked to indicate the minimum expenditure amount they could potentially spend on the designated expenditure categories. The estimated findings suggest that allowing endogenous minimum consumption amounts within the MDCEV model results in a better understanding of the determinants driving individuals’ expenditure behaviour, whilst also providing more accurate prediction both within and out of sample.