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Aggregation and Closed-Form Results for Nonhomothetic CES Preferences

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  • Bohr, Clement
  • Mestieri, Marti
  • Yavuz, Emre

Abstract

We provide four novel results for nonhomothetic Constant Elasticity of Substitution preferences (Hanoch, 1975). First, we derive a closed-form representation of the expenditure function of nonhomothetic CES under relatively flexible distributional assumptions of demand and price distribution parameters. Second, we characterize aggregate demand from heterogeneous households in closed-form, assuming that household total expenditures follow an empirically plausible distribution. Third, we leverage these results to study the Euler equation arising from standard intertemporal consumption-saving problems featuring within-period nonhomothetic CES preferences. Finally, we show that nonhomothetic CES expenditure shares arise as the solution of a discrete-choice logit problem.

Suggested Citation

  • Bohr, Clement & Mestieri, Marti & Yavuz, Emre, 2023. "Aggregation and Closed-Form Results for Nonhomothetic CES Preferences," CEPR Discussion Papers 18606, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18606
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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