Consumer Demand Equations Research Articles

Agricultural commercialization and food security: an ex-ante approach

PurposeThe lack of theoretical and pragmatic way of measuring agricultural commercialization has been responsible for the inconsistent results for the impact of agricultural commercialization on household welfare. This study makes use of an input-based market participation approach that utilizes household preplanting production decision to stratify farming households according to production orientation.Design/methodology/approachThe study estimates a system of input and consumer demand equations. It augments traditional input and consumer demand equations with an additional variable based on an endogenous switch, which measures the probability of being a commercial farming household. Empirical evidence suggests that market orientation is an important determinant of the level of traded input and hence, market participation. Predicted probabilities obtained from the endogenous switch are used to stratify households into subsistence and commercial agricultural households.FindingsResults of the relative effect of commercial agriculture on the level of household food security support the claim that production orientation does affect the relationship between the relative share of food expenditure to the household total expenditures and the logarithm of household expenditure for this part of sub-Saharan Africa.Research limitations/implicationsAs in the case of all generalized method of moments studies, the results depend on the robustness of the instruments. However, search for better instruments may run afoul of Leamer's ad hoc specification search with nonexperimental data.Originality/valueThis paper is original in its formulation of an endogenous switch between subsistence and commercial agriculture. This switch is estimated as a latent variable following a logit form.

Duality Theory for Variable Costs in Joint Production

AbstractDuality methods for incomplete systems of consumer demand equations are adapted to the dual structure of variable cost functions in joint production. This allows identification of necessary and sufficient restrictions on technology and cost so that conditional factor demands can be written as functions of input prices, fixed inputs, and cost. These are observable when variable inputs are chosen and committed to production, hence the identified restrictions allow ex ante conditional demands to be studied using observable data. This class of production technologies is consistent with all von Neumann–Morgenstern utility functions when ex post production and/or output prices are uncertain.

Testing and imposing Slutsky symmetry in nonparametric demand systems

Maximization of utility implies that consumer demand systems have a Slutsky matrix which is everywhere symmetric. However, previous non- and semi-parametric approaches to the estimation of consumer demand systems do not give estimators that are restricted to satisfy this condition, nor do they offer powerful tests of this restriction. We use nonparametric modeling to test and impose Slutsky symmetry in a system of expenditure share equations over prices and expenditure. In this context, Slutsky symmetry is a set of nonlinear cross-equation restrictions on levels and derivatives of consumer demand equations. The key insight is that due to the differing convergence rates of levels and derivatives and due to the fact that the symmetry restrictions are linear in derivatives, both the test and the symmetry restricted estimator behave asymptotically as if these restrictions were (locally) linear. We establish large and finite sample properties of our methods, and show that our test has advantages over the only other comparable test. All methods we propose are implemented with Canadian micro-data. We find that our nonparametric analysis yields statistically significantly and qualitatively different results from traditional parametric estimators and tests.

Economic comparison of greenhouse gas mitigation options in Germany

Our objective is to provide a balanced analysis of greenhouse gas mitigation options, across a variety of climate policy scenarios, for Germany. At least four classes of greenhouse gas mitigation options are available: energy efficiency, fuel switching, CO2 capture and storage (CCS), and reductions in emissions of non-CO2 greenhouse gases. These options vary by cost, timing, and our ability to represent them in an economic analysis. We use the Second Generation Model, an economy-wide computable general equilibrium (CGE) model that embodies greenhouse gas mitigation possibilities from the energy system and CCS. Policy scenarios are represented as a response to varying levels of a price for greenhouse gas emissions, either applied economy-wide or targeted at energy-intensive sectors of the economy according to the EU emissions trading scheme. Energy efficiency options are represented in the standard CGE format where non-energy inputs substitute for energy inputs within economic production functions, or system of consumer demand equations, as the price of energy increases relative to other goods. The electric power sector provides substantial opportunities for fuel switching and the deployment of advanced electricity-generating technologies, with and without CO2 capture and storage. Our methodology relies on engineering descriptions of electricity-generating technologies and how their competitive positions vary with a CO2 price or change in fuel price. Further, we allow for reduction of emissions of non-CO2 gases, which adds a set of mitigation opportunities not usually included in energy-economic modeling efforts. A formal decomposition methodology is used to isolate the contribution of each greenhouse gas mitigation option.

Indirect addilog translation of indirect utility functions

Abstract The difficulty of specifying a set of consumer demand equations that can simultaneously display compatibility with rational economic behaviour (regularity) and have the capacity to represent a comprehensive spectrum of consumer behaviour (flexibility) is well known. A variety of approaches have been investigated in the literature, but scope for substantial improvement remains. The approach of this paper is to start from indirect utility functions producing globally regular, if inflexible, systems and to improve flexibility by adding parameters through a device termed ‘indirect addilog translation.’

Prices and Unit Values in Poverty Measurement and Tax Reform Analysis

Researchers often use unit values (household expenditures on a commodity divided by the quantity purchased) as proxies for market prices when calculating poverty lines and estimating consumer demand equations. Such proxies are often needed because community price surveys in developing economies are either absent or suffer quality problems. However, using unit values may result in biases due to measurement error and quality effects. In a household survey experiment, information on prices was obtained in three ways: from unit values, from a market price survey, and from the opinions of householders who were shown pictures of items and asked to report the local price. The three sets of price data are used to calculate poverty lines, estimate price elasticities, and analyze marginal tax reforms. There are substantial biases when unit values are used as a proxy for market price, even when sophisticated correction methods are applied. Performance was better for the price opinions of household members. The results highlight the importance of price collection methods and the need to consider the wider costs of having potentially unreliable community-level price data.

Applied Demand Analysis: A Survey*

Applied demand analysis is usually taken to refer to the microeconomic analysis of consumer and producer behaviour, especially the nature of input demand and consumer demand equations. In this paper, we shall confine ourselves to consumer demand and provide a review of the relevant theory and empirical results. According to Stigler's (1954) survey of early research, applied demand analysis has a long history going back to the 1790s in England with the budget studies of David Davies and Sir Frederick Morton Eden. Regarding the role of prices in determining consumption, Stigler (I 954, p. l 03) argues that 'systematic and cumulative work ... began only in the 1870s ... when Fleeming Jenkin, Jevons, W alras, Marshall and others began to develop the demand function or curve as an integral part of the theory of price formation'. The earliest empirical analysis known to Stigler of the relationship between prices and quantities consumed was carried out in 1861 by Ernst Engel (whose 1857 famous budget study led to what is now known as 'Engel's law'-the proportion of income devoted to food declines with increasing income). Engel's 1861 research dealt with harvests and prices of rye in Prussia for the period 1846-61.

Aggregation and consumer behaviour: some recent results

The availability of household-level data covering long periods of time makes it relatively easy to assess likely sources of aggregation bias. In this paper, we illustrate a promising methodology, which requires computing aggregation factors across households. If these factors are stable over time, aggregate data can be used to estimate micro-parameters. Our application covers consumer demand equations, and dynamic consumption relations, but the methodology could be applied in a variety of different contexts.

Consumer demand, ?full income? and real wages

This paper develops and tests a model of consumer behaviour in which income and leisure are simultaneously chosen. Using a version of the AIDS, we develop a system of consumer demand equations in which consumer demand depends on ‘full income’, relative prices and the real wage rate, and we find that the predictions of the model are not rejected.

The Inforum Model of the Polish Economy

A demand-oriented model for Poland is developed. A number of special features are incorporated to reflect the realities of the Polish economy and to take advantage of some of the statistics which are available in Poland but not in Western Europe. These special features include disequilibrium indicators in the consumer demand equations, direct measurement of capital stocks and technological progress, allowance for hoarding of obsolete equipment, strong connections between input coeffcients and new investment, and the treatment of liquidity overhang. Results of simulations showed correctly in advance the effects of the 1990 austerity policy. Experiments indicate the best way to use foreign investment funds.

An Analysis of Consumers' Expenditure in Queensland: 1948 – 1985

This paper presents the results of estimating a set of consumer demand equations for the Queensland economy. The model adopted is the Almost Ideal Demand System of Deaton and Muellbauer. The model is estimated for four commodity groups: Food, Clothing, Household equipment and operation and Other Expenditure excluding housing. The model is estimated using a static representation and using two dynamic variants. After discussion of the results, the estimated expenditure and own price elasticities are compared to those estimated in previous studies.

Forecasting with demand systems: A comparative study

Six systems of consumer demand equations are considered using seasonally adjusted quarterly U.K. data. The homogeneity and symmetry restrictions are tested where appropriate and are only convincingly rejected by one model. The estimated models are used to generate forecasts using fourteen post-sample observations and a simple habit formation model is found to be superior. Each system is tested for parameter constancy over the forecast period and only the dynamic models pass this test. The results highlight the importance of dynamics in demand systems but suggest that simpler structures may be more appropriate for forecasting. The use of small-sample adjusted test statistics can have a dramatic impact on inferences drawn.

An intertemporal system of dynamic consumer demand functions

This paper constructs and estimates a system of dynamic consumer demand equations under the assumption of rational expectations about anticipated human wealth. The traditional one-period budget constraint is replaced by the lifetime anticipated wealth constraint. Lagged dependent variables are rationalized by an adjustment cost argument. In the model presented, both the dynamic adjustment coefficients as well as the parameters characterizing the underlying long-run preferences are identified and can be estimated. We find that a weak version of the REH cannot be rejected on the data. In common with most empirical studies on demand behaviour we have to reject the symmetry restrictions.

Estimating a complete set of state demand equations for planning: The Rhode Island experience

The objectives of this paper are twofold: one is to estimate a complete set of twenty consumer demand equations at the state level: and the other is to investigate all the possible lag structures for real personal disposable income and relative price, and to choose that set of consumer demand equations with the best lag structures by an iterative algorithm. The extremely high coefficient of determination and other merits seem to suggest the worthiness of this approach.

Consumer demand for meat and the evaluation of agricultural policy

This study utilizes an econometric model of equilibrium in the U.S. livestock and feedgrain markets to investigate a number of questions of economic methodology and policy. Both nonlinear consumer demand equations that obey the constraints of neoclassical demand theory and a model of supply are used. This approach allows for the measurement of the effects on consumer welfare of actual government policies. In particular, the model is employed to analyze the welfare effects of an actual policy situation — the sale of U.S. grain to the Soviet Union in the third quarter of 1972.

Flexible Consumer Demand Functions and Linear Estimation: Comment

In a recent article in this Journal, Swamy and Binswanger (SB) claim that consumer demand equations in real income and relative prices can be obtained directly by differentiating a cost function in which output is replaced by real income. The advantage of this approach, they maintain, is that we can obtain observable demand functions, linear in parameters, which are integrable into wellbehaved expenditure and indirect utility functions. This approach to deriving demand functions, however, is considerably less general than SB maintain. Their method of derivation assumes that changes in utility can be approximated by changes in real income. Changes in utility are proportional to changes in real income for any given price vector, but this proportionality factor will change when prices change unless indifference curves are everywhere parallel. This latter condition obtains only when the direct utility function is homothetic, implying unitary income elasticities throughout. This means, as a description of the real world, SB's method can have only local validity, not global validity like Roy's identity. This also means that the three functional forms proposed by SB are best regarded as statistical demand functions, integrable into an arbitrary neoclassical utility function only at some base point. SB's method of deriving consumer demand functions is to replace the utility level in the Hicksian demand functions by real income. They maintain this approach is possible because certain index numbers can be estimated which, when used to deflate nominal income, provide estimates of changes in real income that correspond exactly to changes in utility levels (p. 676). The problem with this approach is that, in contrast to output in producer theory, utility is unobservable. Thus, arbitrary changes in utility cannot be calculated from changes in real income unless we know the parameters of the utility functions. (This is true regardless of how accurately real income is measured!) This is equivalent to saying that, in general, the relationship between changes in utility and changes in real income is not independent of prices. To verify this claim, consider the total differential of the Hicksian demand function, Xi(U,P), which can be written (1) d(log X,)

Modelling Price Expectations in Intertemporal Consumer Demand Systems: Theory and Application

ONE of the most puzzling dichotomies in economics is that between the microeconomic theory of consumer demand and the consumption function of macroeconomics. Although there is now a highly developed literature on the specification and estimation of systems of consumer demand equations, this is basically a theory of allocation, i.e., given the level of consumption, how is it to be allocated among the various categories of consumer goods? This literature takes as given the allocation of current income between consumption and savings, and hence contributes very little to the specification of the consumption function. A notable exception to this dichotomy is the Extended Linear Expenditure System (ELES) proposed by Lluch (1973), an intertemporal model of consumer decision making which endogenizes not only the allocation of consumption across commodities, but also the consumption-saving decision, and hence generates a consumption function which is firmly based in microeconomic theory. However, ELES is based on the rather special Klein-Rubin instantaneous utility function, which will be shown below to have quite restrictive implications. In fact, when the problem is set up in terms of the indirect utility function, generalizations of the Klein-Rubin form are easily incorporated into the intertemporal optimization problem. A second generalization of ELES relates to price expectations. Most empirical applications of ELES, for example, Lluch, Powell and Williams (1977), Lluch and Williams (1975) and Powell (1973) have generally assumed static price expectations and have depended upon the continual replanning assumption to justify observed price movement through time. Where price expectations have been considered, it has usually been in an ad hoc manner. Additionally, these models have generally assumed constant (current) nominal interest rate expectations,'which would appear to be inconsistent with an assumption of stationary price expectations, since the current nominal rate of interest will include a premium for inflation. In a previous paper (Cooper and McLaren (1980a)), an initial attempt was made to integrate a model of the formation of price expectations into an intertemporal consumer decision making model at the optimization stage. Two weaknesses of this model were the restriction to the case of a Klein-Rubin utility function, and the inconsistency of the assumptions made about interest rate expectations with those on price expectations. In the following two sections we present a reasonably general model of intertemporal consumer decision making incorporating price and interest rate expectations which overcomes these two weaknesses. Section IV presents the estimating forms based on a particular choice of functional forms, and estimates using Australian data are presented in section V.

TRUE HOUSEHOLD EQUIVALENCE SCALES AND CHARACTERISTICS OF THE POOR IN THE UNITED STATES

In this paper we deal with the question of which measures of economic well‐being are adequate to identify those groups of households in the U.S. whose economic conditions justify public concern and assistance. We derive a utility based measure of economic well‐being from the estimation of a complete set of consumer demand equations. The demand system is Lluch's Extended Linear Expenditure System (Lluch, 1973). Household characteristics are incorporated using the scaling method proposed by Barten (1966). Using the welfare indicator derived, we study the composition of the poorest part of the population, using data from the 1972–73 Consumer Expenditure Survey. We compare our results with those obtained using various other welfare indicators, including the official U.S. poverty line. We show that using different family composition adjustments significantly and systematically affects just who are considered to be at the bottom of the welfare distribution. We finally suggest that program designers therefore can improve their target efficiency by carefully selecting from among the acceptable indices of welfare when defining program eligibility.

The impact of interest subsidies on the inter- regional allocation of capital: An econometric analysis for Belgium

Regionally differentiated interest rate subsidies are assumed to have on theoretical grounds both a generative and a redistributive impact on investment. In the conventional econometric approach, these effects are captured by the interest rate parameters that appear in regional investment functions which are usually estimated by single equation methods. This paper focusses on the redistributive impact of regional interest subsidies. The theoretical framework choosen for the analysis is that of a multiregional firm that maximizes overall profits subject to a capital cost constraint. The resulting allocation model for capital stock is similar to a system of consumer demand equations. It is estimated by a maximum likelihood method. The empirical results indicate that the redistributive effects of interest rate subsidies are significant.

A Complete System of Consumer Demand Equations for the Australian Economy Fitted by a Model of Additive Preferences

A Complete System of Consumer Demand Equations for the Australian Economy Fitted by a Model of Additive Preferences