Moveable Feasts: a New Approach to Endogenizing Tastes

We argue that tastes can be understood as the result of utility maximizing behavior in the distant past. This previous maximizing behavior may have long-lived consequences, which we usually take as tastes or preferences. As the old maximization problem depends critically on old relative prices, we use old relative prices to endogenize tastes, overcoming many of the criticisms of the taste formation literature. We begin by illustrating how current prices and income fail to explain significant amounts of variation in demand. We estimate that as much as one-half of the variation in prices and income are due to taste differences. To test the implications of our theory, we estimate the demand for food using unique household consumption and price data from the nineteenth century. We use contemporaneous prices and prices in the home countries of immigrants measured fifteen years prior to our consumption survey. We establish that the old relative prices are uncorrelated with the contemporaneous relative prices. We find that older relative prices have a large and significant effect on the demand for food. We conclude by noting how our empirical strategy can be used to measure changes in taste in both microeconomic and macroeconomic contexts. Preliminary and Incomplete, Comments Welcome Please do not Quote or Cite Without the Permission of the Authors JEL Codes: D0, D1, N3 Logan: 410 Arps Hall, 1945 N. High Street, Columbus, OH, 43210, email: [email protected]. Rhode: 401NN McClelland Hall, 1130 E. Helen Street, Tucson, AZ 85721, email: [email protected]. We thank Rodney Andrews, Stanley Engerman, Price Fishback, Claudia Goldin, Tim Guinnane, Dan Levin, Petra Moser, Joseph Newhard, Andrew Postlewaite, David Schmeidler and participants at the 2008 Stanford Institute of Theoretical Economics (SITE) for comments. The usual disclaimer applies. “In modern treatments of self interest, economists take statements of preferences as ‘primitives.’ That is, statements such as ‘Mary prefers punk rock to country-and-western music’ are taken as meaningful, as statements that require no explanation. The question ‘Why does Mary prefer punk to country and western?’ – interesting and important as it may be – is not treated in ordinary economic science.” [Eaton and Eaton, 1988, p. 40. Emphasis in original.] Early studies of consumer behavior are rife with ethnic stereotypes about consumption. Italians were undernourished because they favored “an excess of fuel in the forms of wheat flour, pork, lard, and second-rate vegetables,” and Italian “cooking is indefensibly uneconomical... too much fuel and too little protein” [Streightoff 1911, p. 94]. Another observer noted “the Italians’ well known dependence on macaroni and dried beans” [Chapin 1909, p. 124]. Unlike Italians, Slavs were malnourished because they had high marginal propensities to save, and valued a saved dollar over a full stomach [Byington 1910]. The list covers almost every ethnic group-Russians and Austrian Jews consumed more meat than other ethnic groups, Germans and the Irish spent the most on alcohol [Chapin 1909]. Researchers continue to find large consumption differences by race and ethnicity today [Charles, Hurst and Roussanov 2008]. But in a very important way they show the nagging persistence of neoclassical economic thought—all these studies take “tastes” as given and beyond the scope of theoretical analysis. Italians eat macaroni and dried beans because they prefer them, just as Russians prefer meat and Slavs their savings. Despite the significant advances in consumer theory and applied economics since consumer studies laid out the first laws of demand, progress on the primitives of demand theory has been slow. Tastes must come from somewhere, and we argue that they should not be wholly orthogonal to economic variables. In this paper we attempt to endogenize tastes empirically, and show that existing theoretical approaches justify our empirical approach. We break new ground