Service Expenditure and Intertemporal Elasticity of Substitution in Japan

In this paper, we employ a cointegration approach to empirically analyze consumer behavior related to service expenditure in Japan. The model we employ is a CRRA utility function considering service and non-durable expenditures. The ratio of service expenditure reached 50% in the 1980s in Japan, and it has been increasing. It indicates that service expenditure is an important factor in analyzing consumer behavior. The empirical results show that the intertemporal elasticity of substitution of service expenditure is positive, significant and greater than that of non-durable expenditure. These results are caused by the growing ratio of selective service expenditure.