Is New York as Expensive as You Think?

Catherine Rampell has an interesting piece on this issue that is worth reading. It  highlights research from Jessie Handbury, who makes three points in a recent paper:

First, I find that there are large differences in how high- and low-income households perceive the price levels across U.S. cities. For example, a low-income household earning $15,000 a year faces approximately 20 percent higher grocery costs in cities with relatively high per capita income like San Francisco relative to cities with half that per capita income, such as New Orleans. But the exact opposite is true for high-income households earning $100,000 a year. Their grocery costs are 20 percent lower in the city with the higher per capita income.

Second, I show that these differences are related to cross-city variation in product variety, rather than prices. High-income households are better off in wealthier cities because more varieties of the high-quality products that high-income consumers prefer to consume are available in these locations.

Finally, I find that a standard homothetic price index does a better job of predicting the distribution of costs across locations for low- and middle-income households than it does for high-income households. The homothetic price index is highly correlated with the grocery costs I have measured for households with incomes below $70,000, but negatively correlated with the grocery costs for households with in- comes above $100,000. The homoethic index systematically underestimates the costs faced by high- income consumers in wealthy relative to poor cities.

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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