Academic journal article Journal of Forensic Economics

Patton & Nelson Personal Consumption Revisited: Is Income Important?

Academic journal article Journal of Forensic Economics

Patton & Nelson Personal Consumption Revisited: Is Income Important?

Article excerpt

The recent updating of the Patton & Nelson Personal Consumption Tables by Lierman, Patton and Nelson (1998) (hereafter "P&N Tables" or simply "Tables"), their publication in a slide-rule format for lawyers (by Lawyers and Judges Publishing Company) and their appearance in applications manuals such as Martin (1998, [sections] 535) reflect the Tables' continuing popularity among those faced with estimating support loss to survivors in death cases. The updated P&N Tables are the result of the authors applying their original Patton & Nelson (1991 and 1984) procedures and definitions of consumption to the 1994-1995 U.S. BLS Consumer Expenditure Survey (CES).

Though the design of the P&N Tables is well explained in their various articles, one important aspect of the Tables' definitions is apparently not well understood and leads to unsound results in typical applications. If the Tables are adjusted in a manner that seems appropriate to this concern, their reported consumption percentages change significantly. When appropriately adjusted, the P&N Tables resemble very closely the venerable Cheit (1961) and Revised Equivalence Scale (1968) results. This adjustment also raises a substantial question as to whether the P&N Tables' basic contribution (consumption percentages as being importantly influenced by income) is valid.

The method by which the Tables were constructed produces three biases in their application: one from the treatment of household funds used for current expenditures, another from the treatment of savings and a third from the effect of taxation on expenditures. The first bias tends to cause overestimates of consumption percentages, and the other two tend to cause estimated consumption percentages to be too low. Because these specification errors operate differently on households with different income levels, the net effect is to cause the P&N Tables to generate both overestimates and underestimates of correct consumption percentages, depending upon household income levels.

The necessity for avoiding these biases in estimating consumption percentages is not a new idea in the literature of personal consumption percentages. Several authors have produced personal consumption percentages that correctly deal with one or more of the above concerns.(1) The complete set of these adjustments, however, apparently does not appear in a singular reference.

Adjusting the P&N Tables' Direct Personal Consumption Percentages

The personal consumption percentages reported in the P&N Tables are the ratio of "direct personal consumption" to pretax income. The authors have made particular judgements as to which CES-listed items are "direct personal consumption" of the deceased, but these specifications, though inherently arbitrary and subject to debate, are not the ones of concern. Perhaps surprisingly, it is the denominator of the ratio, pretax income itself, which requires adjustment. The necessary adjustment is to substitute the CES household expenditures net of pensions and Social Security for pretax income in the P&N Tables' consumption percentage calculation.(2)

To illustrate this, consider the presentation of Table 1 in the P&N Tables' unadjusted and adjusted consumption percentages applied to actual CES data for two-person households.(3) The data for these households illustrate the three biases that exist in the P&N Tables' percentage consumption results and the adjustments necessary to derive correct percentages.

Table 1 Representative CES Two-Person Households

                                               Higher      Lower
                                               Income     Income

Annual Pretax Income                           $44,326    $7,527
Taxes                                           $3,408      $197
After-tax Income                               $40,920    $7,330
Total Expenditures                             $38,814   $15,889
Pensions & Social Security                      $3,820      $186
Expenditures Minus Pension & SS                $34,989   $15,703
P&N Direct Personal Consumption of Male        $10,905    $4,523
P&N Table Percentage for Male                    24. … 
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