Abstract
In this paper we apply the maximum likelihood method in order to estimate the Rotterdam model of consumer demand. As we dispose of 23 observations and want to distinguish 15 budget categories, well-defined estimators and test statistics can only be obtained by constraining the model in some way. In applied research this is usually done by imposing constraints on the contemporaneous covariance matrix of the disturbances of the model. The purpose of the present paper is to present a new and more flexible restricted specification of this covariance matrix, to compare its performance with those that are usually applied and to investigate the estimation results which it generates.
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