Preliminary Draft A Simple Test of Liquidity Constraints and Whether the Poor Pay More

Is the cost of living higher for the poor? Recent studies based on unit values (the ratio of expenditure to quantity) suggest that poor households pay substantially higher prices because liquidity constraints force them to purchase goods in small quantities and not realize bulk discounts. Unit values are subject to several biases and reflect economizing choices made by households, so they may not reliably estimate the bulk discount schedule facing the poor. Instead, this paper uses individual transaction records in household expenditure diaries, which report not only expenditure and quantity but also the brand (if available), unit size and number purchased in each transaction. The bulk discount schedule is estimated for four foods (rice, canned meat, canned fish and chicken) that make up one-third of the total food budget in a survey in urban Papua New Guinea. For each food the regressions are based on the dominant brand(s) so there is no quality variation and the estimated price schedule only reflects discounts due to variations in purchase quantity. All four foods have precisely measured but small elasticities of unit price with respect to quantity purchased. In contrast, unit value methods used in previous studies gave inaccurate measures of the price schedule for bulk buying. Because the poor do buy smaller quantities in each purchase, the unit value methods tend to overstate the extent to which the poor pay more for their food. JEL: D12, I32, O15