An application of LDV models to household expenditure analysis in Mexico

Abstract

In this paper Mexican household survey data is used to estimate the Extended Linear Expenditure System. The estimation is carried out taking into account the non-negative nature of expenditures through the use of Limited Dependent Variable (LDV) models. Substantial differences are found in estimated demand responses between OLS and MLE on the LDV models. If the latter estimation procedure is taken as appropriate the findings show that commonly used OLS results may significantly overestimate the marginal propensity to consume and may considerably underestimate subsistence expenditures.