A structural model of consumption: An application to China during the global financial crisis

In this paper, we develop a structural model of consumption by incorporating psychological constructs which constitute important antecedents of household consumption and provide crucial structural linkages to the mental accounting evaluation of saving or consumption. Our model is tested using structural equation modeling (SEM). The model is applied to China for measuring consumption expenditure under uncertainty emanating from the 2008 global financial crisis. An empirical test using 9784 new Chinese household survey data show that our structural model is a significant improvement over the existing behavioral life cycle model, as it is able to capture the psychological states affecting different groups of consumers such as employed workers and unemployed retirees. Our new structural model of consumption fits the data very well. The results have important implications for public policy assessment.

► Psychological factors are of paramount importance in consumption modeling. ► Previous behavioral life cycle model empirically tested for the first time. ► Our new model is more plausible and has practical policy implications.