Specification and time series estimation of dynamic Gorman Polar Form demand systems

Abstract

This paper proposes and estimates demand functional forms which are based on (a) nonseparable generalisations of LES, and (b) dynamic generalisations which extend the linear habit formation idea to incorporate more complex habit forming behaviour and allow purchases in the more distant past to affect current behaviour. The paper uses a new general demand functional form which, like the ‘Almost Ideal Demand System’, satisfies ‘consistent’ aggregation across individuals but, unlike it, allows for a separate test of linear Engel curves and additively separable preferences. The results of estimation on U.K. time series data (1900–1980) are, generally, positive and point to a degree of complexity in dynamic demand behaviour that is greater than seems to have been appreciated hitherto in the empirical literature.