Consumer Casualties

Exploring the Economics of Habit, Information, and Uncertainty in Japan

J. Wan

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137384843
• Topic: Business
• Subtopic: Marketing
• Index: Business

Junmin Wan takes a two prong approach to analysing this pressure in Japan in his new volume Consumer Casualties. He first clarifies the consumer preference for habit to identify useful approaches toward solving a number of economic issues, such as gambling and other addictive practices.

1

Introduction

1.1   Objectives of This Research

There were two objectives in pursuing this study. One was to clarify the consumer preference for habit, information, and uncertainty (and wealth) in order to identify useful approaches for solving a number of economic issues (such as gambling, spurious bubble, bubble, etc.). The other was to test a number of theories in the field of economics in order to determine their causalities and validities by “natural experiment,” and to make a number of proposals for policy making. These two points will be elaborated more explicitly in the following section.

First, I maintain, like most economists, that a market-oriented economy is better than a centrally planned economy, as an economic system. In a market economy, however, there are series problems, such as negative externality, bubble crash (Scheinkman and Xiong, 2003), etc. For example, there have been serious consequences in the Japanese economy since the bubble crash at the end of the 1980s. Important questions in this respect are, what should be done after a bubble crash, and why did the bubble occur in the 1980s? Ogawa (2003) has pointed out that the bubble crash caused a decrease in firm investment, and an increase in bad debts, in banks. He also proposed that the bad debts of firms and banks should be resolved in order for the economy to recover. Ogawa and Wan (2004, 2007) pointed out that the bubble crash also caused bad debt within Japanese households and a decrease in consumption; they proposed that the bad debts of households should also be resolved in the current recession. These studies are ex post and are useful for the current recession. However, the best solution is the prevention of bubbles arising in the first place. We still do not understand clearly why this phenomenon arises. There may be many factors involved, including the behavior of consumers, firms, the government, as well as social norms, etc. I focus here on consumers’ preference with respect to habit, information, uncertainty and wealth. This is because, when consumers make decisions, their habits (historical activities), current information, and preference with respect to future uncertainty, and wealth will essentially influence their decisions and activities after their decisions. For example, if consumers persist in seeking money or wealth, a spurious bubble (persistent deflation) may take place.¹ There are also other phenomena that are analogous to an economic bubble. For example, a gambler pays for (gambling) a significantly negative expected return, and yet the purpose of gambling is to win. If the gambler is addicted to gambling, he or she may become bankrupt (something akin to a bubble crash).² If a consumer does not have sufficient information regarding goods, he or she may over- or underconsume these goods because his or her shadow price or willingness to pay³ may be mistaken, as compared to a situation in which he or she has optimal, full information.

Second, there are many theories, with supporting evidence, that offer explanations but not the causalities, or the interior mechanisms, of economic facts or issues; this is because there are too many unobservable characters with respect to economic issues. For any one economic fact, there are always many seemingly logical explanations, with the most appropriate explanation being one of many. Therefore, there could be too much theoretical “noise,” which could mislead an expert or a governing body. We need to clarify which of the available explanations describes the interior mechanism of an economic phenomenon and shows causality. This is difficult to do because we cannot provide the solutions to social issues in the same way as conducting a natural science experiment in the laboratory. Social experiments involve huge costs and require extensive periods of time. However, if we can identify historical events that are sufficiently close to experiments, as would be performed in a laboratory, we may more easily test economic theories and identify the causality of economic phenomena. This approach has been termed that of the “natural experiment⁴” in recent economic studies. I have used this approach to test a number of theories (some elaborated) and to make proposals for economists involved in policy making.

1.2   Motivation for, and Structure of, This Book

Why have I undertaken research into consumers’ preferences for habit, information, uncertainty, and wealth? Because a consumer’s habit (historical activities), current information, and preference for uncertainty and wealth with respect to the future will essentially influence his or her decision making and activity after making the decision. The reason for using the “natural experiment” approach is that I wish to test economic theories, and to find the causality behind economic facts, by using historical events that do not involve high costs in terms of time and money.

It is very difficult to empirically test the habit, information, and uncertainty issues set out above because they are too abstract, even though these factors play invaluable roles in economics. I have found that the consumption of some unique goods and certain activities, such as cigarettes, pachinko gambling, and lottery gambling, can provide suitable tests for the issues of habit, information, and uncertainty. I have also found that there are many historical events that show a similarity to natural experiments in Japan and China. Therefore, I have analyzed these events, case by case, according to a number of standard theories in economics. In every case study or chapter, the keywords habit, information, uncertainty, and natural experiment occur regularly.

Chapter 2 develops a theoretical model in which the rational addictive consumer sets out an optimal inventory for tax change and empirically tests it. Before the tax increase, the government makes a new law implementing it and announces it. Thus, consumers can use perfect foresight with respect to future tax and price in order to decide their own optimal consumption and inventory. There are many events of this type in Japan; these events can be considered natural experiments.

Chapter 3 develops a theoretical model in which the rational, addictive consumer makes an optimal decision for consumption based on limited information about the health damage caused by consumption. This chapter also tests the model using time-series data and several national surveys on smoking in Japan.

Chapter 4 introduces a new way to examine the effects of mandatory information disclosure on interbrand cigarette demand and the behavior of a monopolistic firm in Japan. The mandatory disclosure of nicotine and tar content can also be considered a natural experiment.

Chapter 5 discusses the addictiveness of pachinko gambling using individual data from Japanese pachinko surveys. The gain from gambling is uncertain before the gambler participates in the activity.

Chapter 6 analyzes pachinko gambling and cigarette smoking, simultaneously, using some unique questions arising from individual data from the Japanese Pachinko Survey. The two goods are addictive and exhibit uncertainty. Uncertainty about winning means that pachinko play constitutes gambling. Health damage occurs from smoking; thus, gain from smoking is also under uncertainty.

Chapter 7 highlights a new system of taxation implemented in China both theoretically and empirically. A lottery receipt system has been introduced and has been implemented as an experiment in many areas. It constitutes a real social experiment in that it is recognized as an experiment by the present government of China. The lottery is used to avoid information asymmetry between the government and firms. The lottery buyer’s gain from the lottery is uncertain.

Chapter 8 first theoretically analyzes the linkage between the Life Cycle and Ono’s models, then tests them empirically using time-series data and several surveys on lottery purchase and on big prize winners in Japan. The gain from a lottery is uncertain. The prize winners are randomly determined by the lottery numbers; this type of event also constitutes a natural experiment.

Chapter 9 concludes the book and presents some issues for future research.

1.3   Main Findings and Issues Left for Future Research

The main findings and issues left for future research are summarized in Chapter 9. There have been numerous findings arising from this study in addition to a number of proposals for economists and policy makers. See Chapter 9 for details.

2

Rational Addiction with an Optimal Inventory: Theory and Evidence from Japanese Daily and Monthly Purchases

2.1 Introduction

There are two main issues when estimating demand or supply equations. One is that the price becomes endogenous because demand and supply are determined simultaneously. Therefore, it is very difficult to estimate the demand or supply equation using aggregate data. A natural experiment constitutes a good approach for solving this problem. For example, Angrist et al. (2000) use typhoons as an instrument for price in estimating fish demand. The second issue is that the price becomes endogenous because some unobserved factors become omitted variables in the error term and correlate with the price. For example, rational consumer behavior, like hoarding when faced with a price increase, is correlated with price.

These two issues have not been resolved well in previous research. For example, in Becker et al. (1994), it is difficult to consider the price of cigarettes as exogenous to the consumer for two reasons. First, the price is determined by several oligopoly companies. Second, cigarette sales are considered to equal consumption (as a proxy for cigarette consumption), because it is difficult to observe actual cigarette use. Consumer hoarding behavior before an increase of cigarette tax is not considered.

Recently, several articles have analyzed the consumer’s inventory. Feenstra and Shapiro (2001) have pointed out that the Consumer Price Index (CPI) cannot be calculat...

Table of contents

• Cover
• Title
• 1 Introduction
• 2 Rational Addiction with an Optimal Inventory: Theory and Evidence from Japanese Daily and Monthly Purchases
• 3 Response to Health Information: Theory and Evidence from Cigarette Consumption and Intake of Nicotine and Tar in Japan
• 4 Responses of Consumers to Mandatory Disclosure of Information: Evidence from Japanese Interbrand Cigarette Sales
• 5 Is Gambling Addictive? Evidence from Pachinko Participation, Quitting, and Reinitiation
• 6 Are Gambling and Smoking Complementary? Direct Tests from Japanese Individual Data
• 7 Tax Revenue in China and the Incentive to Declare Taxes: The Lottery Receipt Experiment
• 8 Is the Life Cycle Model or Ono’s Model Most Suitable for the Japanese? Analysis by Time-Series Data and Surveys of Lottery Purchase and Large Prizewinners
• 9 Conclusions
• Notes
• Bibliography
• Name Index
• Subject Index