Economic Theory

Demand System Specification and Estimation by Robert A. Pollak

By Robert A. Pollak

This publication explores the crucial matters curious about bridging the distance among the natural thought of customer habit and its empirical implementation. The theoretical start line is the well-known static, one-period, application maximizing version during which the patron allocates a set funds between competing different types of products. The authors concentration upon 4 problems with fundamental value in empirical call for research: the constitution of personal tastes, the therapy of demographic variables, therapy of dynamics, and the specification of the stochastic constitution of the call for method.

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In Section 3 we discuss flexible functional forms, a class that includes the generalized Leontief and all of the translog forms including the "Almost Ideal Demand System" (AIDS) proposed by Deaton and Muellbauer. Because we did not discuss flexible functional forms in Chapter 1, we begin Section 3 with a detailed examination of the translog family. 1. , total expenditure or income) enters in simple ways. We begin by discussing expenditure proportionality, the theoretically important but empirically improbable case in which each good's expenditure elasticity is unity.

56 Notes 1. See Notes to Table 1. elasticities for 1970 for families with two children for expenditure levels prevailing in that year. The elasticities are all higher in absolute value than those given in Tables 1 and 2—indeed the demand for food is now slightly elastic. 45 for the three goods. 25, respectively. Thus the values for food and miscellaneous are consistent with habit formation, while the value for clothing is not. We conclude Chapter 4 by arguing that, although endogenous preferences are tractable in both theoretical and empirical demand analysis, they cause serious difficulties for welfare analysis.

Leontief [1947a, 1947b] shows that this condition is also sufficient. Weak separability has strong intuitive appeal. If we partition the goods into categories such as "food," clothing," and "recreation," it is tempting to assume that the utility function is weakly separable with respect to the subsets of this partition. , X T ) is an intertemporal utility function, where Xt denotes the vector of goods consumed in period t, it is again tempting to assume that the utility function exhibits weak separability, reflecting a type of intertemporal independence.

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