Estimation of the parameters of a linear expenditure system (LES) demand function for a small African economy

The validity of the key behavioral parameters used in the calibration process of computable general equilibrium (CGE) models remains a debated issue in the CGE literature. CGE modelers prefer to borrow from the handful of estimates available in the literature rather than estimating these parameters empirically. The dearth of data is often mentioned as the major reason for compromises to the empirical basis for the parameters used in CGE models. While the empirical literature on demand elasticities based on household expenditure surveys has been relatively available for both developed and developing countries, it remains lacking for African countries. This paper uses a seemingly unrelated regressions method to estimate own-price and income elasticities, as well as Frisch parameters for households whose consumption behavior is described by a Linear Expenditure System (LES) demand function. All the parameters estimated are intended for use in a Lesotho CGE model. The estimation results are generally consistent with the theory predictions.