Heterogeneity Biases, Distributional Effects, and Aggregate Consumption.

Using stratified microdata from the Canadian FAMEX (78-86) surveys, this paper investigates whether observed heterogeneity in marginal propensities to consume across strata actually hinders the aggregation process. Despite significant heterogeneity in marginal responses, the divergences between aggregate predicted consumption and the predictions from a model that uses average strata responses are found to be small, whenever the strata demands are approximatively linear at the main and the commodity group considered is not a luxury good. On the other hand, some cross-sectional estimates obtained by pooling the strata are shown to be contaminated by unwanted cross-moments. Further, the analysis reconciles the factor that while there exists significant heterogeneity in consumer demands, the related distributional effects in the aggregate equation have not been found to be important. Copyright 1995 by John Wiley & Sons, Ltd.