Separability, partial demand systems, and consumer's surplus measures (original) (raw)

Testing separability of public consumption in household decisions

International Review of Applied Economics, 2005

In this paper we propose a sequential strategy, based on the microeconomic approach of the demand theory, in order to test for separability between private and public consumption. The aim of the present work is to verify, using a conditional Almost Ideal demand system, whether the different components of public consumption exert conditioning effects on the allocative structure of private spending. The empirical estimation of the model and the separability tests are developed for both a demand system in five functional categories of private spending, and for a demand system in six categories, where the private expenditures on those goods and services which can also be offered by the public sector are enclosed in a single functional category. The results of the separability tests, obtained using UK data for the 1974-2000 period, show that public individual consumption plays an important role in modifying consumer choices, while public collective consumption does not affect private consumption behaviours. Secondly, the relationships between the different components of private spending and public individual consumption are both of substitutability and complementarity; in particular, we find that public individual consumption and the corresponding private expenditures on "Health, education, recreation and social protection" are complements.

A Unified Approach to Estimating Demand and Welfare

2016

The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers.

Incomplete Demand Systems, Corner Solutions, and Welfare Measurement

Agricultural and Resource Economics Review, 2010

This paper demonstrates how corner solutions raise difficulties for the specification, estimation, and use of incomplete demand systems for welfare measurement with disaggregate consumption data, as is common in the outdoor recreation literature. A simple analytical model of consumer behavior is used to elucidate the potential biases for welfare measurement arising from modeling the demand forMgoods as a function ofM + Nprices (N> 1) and income when individuals do not consume all goods in strictly positive quantities. Results from a Monte Carlo experiment suggest that these biases can be substantial for large-scale policy shocks when prices are highly correlated.

Latent separability and price variation in the estimation of demand System

2010

The aim of this paper is to overcome the problems caused by insufficient price variation in estimating a large demand system. For that, we propose a new form of Stone-Lewbel (SL) cross section prices developed under latent separability that explore individual specific variation in the composition of the bundles of exclusive goods. The estimation of demand system under latent separability needs the choice of at least one exclusive good per group. We estimate Quadratic Almost Ideal Demand System (QAIDS) under weak and latent separability using traditional aggregate price indices and SL prices. Our empirical analysis is based on fifteen non durable goods of a Tunisian Family Expenditure Survey Data. The results show greater differences among effects price and estimates of price elasticities obtained under weak separability and latent separability using both traditional price indices and SL prices. We obtain higher precision of estimates of own price elasticities using SL prices under l...

Approach to Estimating Demand and Welfare ⇤

The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that dier from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unied approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant demand for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the demand for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing demand for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially dierent conclusions for changes in the cost of living from standard index numbers.

Calibration of incomplete demand systems in quantitative analysis

Applied Economics, 2004

We introduce an easily implemented and flexible calibration technique for partial demand systems, combining recent developments in incomplete demand systems and a set of restrictions conditioned on the available elasticity estimates. The technique accommodates various degrees of knowledge on cross-price elasticities, satisfies curvature restrictions, and allows the recovery of an exact welfare measure for policy analysis. The technique is illustrated with a partial demand system for food consumption in Korea for different states of knowledge on cross-price effects. The consumer welfare impact of food and agricultural trade liberalization is measured.

The Theory and Estimation of Individual and Social Welfare Measures

Journal of Economic Surveys, 1995

The most widespread measure of individual welfare is consumer surplus (cs). If consumer surplus is to represent underlying preferences, very restrictive assumptions must be imposed and, worse, the resulting measures completely ignore distributional issues. Applied economists often argue that consumer surplus is a good approximation to the theoretically correct measures and the only feasible choice in practice. This is no longer true; recent advances in estimation techniques have made it possible to determine the approximate values of the correct measures quite satisfactorily. The theory and estimation of social welfare measures automatically involves ethical and distributional judgements. Often, these are difficult to incorporate in intuitive summary indicators that are easy to estimate. A range of money metric measures is presented that provide a more desirable, albeit still problematic alternative. Subject to severe data limitations, the theoretically correct welfare measures can be estimated for a wide range of modelling situations using parametric and nonparametric techniques.