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Testing the Adding Up Condition in Demand Systems

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  • Paris, Quirino
  • Caracciolo, Francesco

Abstract

A test of the adding up condition in demand systems is crucial for determining whether a share format is admissible when the number of sample goods is smaller than the number of commodity choices available to consumers. This test requires the estimation of a demand system in a quantity format. The share specification of any demand system is like a straight jacket: once worn, it forces the error covariance matrix to be singular and the adding up condition to hold whether or not the data generating process warrants it. The empirical verification of the adding up hypothesis uses a five-commodity sample selected from the Canadian Family Expenditure Survey with 4847 observations. Three specifications are considered: AIDS, QUAIDS and EASI. The hypothesis is rejected in all three cases with a high level of confidence.

Suggested Citation

  • Paris, Quirino & Caracciolo, Francesco, 2014. "Testing the Adding Up Condition in Demand Systems," Working Papers 171748, University of California, Davis, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:ucdavw:171748
    DOI: 10.22004/ag.econ.171748
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    References listed on IDEAS

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    Cited by:

    1. Juan Carlos Caro & Shu Wen Ng & Ricardo Bonilla & Jorge Tovar & Barry M Popkin, 2017. "Sugary drinks taxation, projected consumption and fiscal revenues in Colombia: Evidence from a QUAIDS model," PLOS ONE, Public Library of Science, vol. 12(12), pages 1-16, December.

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    More about this item

    Keywords

    Demand and Price Analysis; Productivity Analysis; Research Methods/ Statistical Methods;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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