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Estimating and testing the compensated double-log demand model

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  • Julian Alston
  • James Chalfant
  • Nicholas Piggott

Abstract

In spite of the proliferation of flexible functional forms for consumer demand systems, the double-log demand model continues to be popular, especially in applied work calling for single-equation models. It is usually estimated in uncompensated form. It can also be estimated in compensated form, by deflating the income variable alone using Stone's price index. The compensated form has the same right-hand side as a single-equation version of the popular linear approximation to the Almost Ideal demand model, facilitating the construction of a test for choosing between the two alternatives. This paper demonstrates these results, develops the specification test, and illustrates its application using US meat consumption data. Simulations suggest that the test is well-behaved with good power in typical applications.

Suggested Citation

  • Julian Alston & James Chalfant & Nicholas Piggott, 2002. "Estimating and testing the compensated double-log demand model," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1177-1186.
    • Handle: RePEc:taf:applec:v:34:y:2002:i:9:p:1177-1186
    DOI: 10.1080/00036840110086003
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    6. Menezes, Carmen F. & Henry Wang, X. & Bigelow, John P., 2005. "Duality and consumption decisions under income and price risk," Journal of Mathematical Economics, Elsevier, vol. 41(3), pages 387-405, April.
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    12. Musyoka, M.P., 2010. "Using Double-Log Imperfect Import Substitutes Model to Estimate Compensated Elasticities and Welfare Impacts," 2010 AAAE Third Conference/AEASA 48th Conference, September 19-23, 2010, Cape Town, South Africa 95774, African Association of Agricultural Economists (AAAE).
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