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Latent separability and price variation in the estimation of demand System

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Listed:
  • Cherif, Olfa
  • Ayadi, Mohamed

Abstract

The aim of this paper is to overcome the problems caused by insufficient price variation in estimating a large demand system. For that, we propose a new form of Stone-Lewbel (SL) cross section prices developed under latent separability that explore individual specific variation in the composition of the bundles of exclusive goods. The estimation of demand system under latent separability needs the choice of at least one exclusive good per group. We estimate Quadratic Almost Ideal Demand System (QAIDS) under weak and latent separability using traditional aggregate price indices and SL prices. Our empirical analysis is based on fifteen non durable goods of a Tunisian Family Expenditure Survey Data. The results show greater differences among effects price and estimates of price elasticities obtained under weak separability and latent separability using both traditional price indices and SL prices. We obtain higher precision of estimates of own price elasticities using SL prices under latent separability.

Suggested Citation

  • Cherif, Olfa & Ayadi, Mohamed, 2010. "Latent separability and price variation in the estimation of demand System," MPRA Paper 36491, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36491
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    File URL: https://mpra.ub.uni-muenchen.de/36491/1/MPRA_paper_36491.pdf
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    References listed on IDEAS

    as
    1. Blundell, Richard & Robin, Jean Marc, 1999. "Estimation in Large and Disaggregated Demand Systems: An Estimator for Conditionally Linear Systems," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(3), pages 209-232, May-June.
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    3. repec:spo:wpmain:info:hdl:2441/f0uohitsgqh8dhk9820172631 is not listed on IDEAS
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    6. Anderson, Ronald W, 1979. "Perfect Price Aggregation and Empirical Demand Analysis," Econometrica, Econometric Society, vol. 47(5), pages 1209-1230, September.
    7. Lewbel, Arthur, 1996. "Aggregation without Separability: A Generalized Composite Commodity Theorem," American Economic Review, American Economic Association, vol. 86(3), pages 524-543, June.
    8. Arthur Lewbel, 2001. "Demand Systems with and without Errors," American Economic Review, American Economic Association, vol. 91(3), pages 611-618, June.
    9. Dhar, Tirtha Pratim & Chavas, Jean-Paul & Cotterill, Ronald W., 2003. "An Economic Analysis of Product Differentiation under Latent Separability," 2003 Annual meeting, July 27-30, Montreal, Canada 21892, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Blackorby, Charles & Primont, Daniel & Russell, R. Robert, 1977. "On testing separability restrictions with flexible functional forms," Journal of Econometrics, Elsevier, vol. 5(2), pages 195-209, March.
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    12. Arthur Lewbel, 1989. "Identification and Estimation of Equivalence Scales under Weak Separability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(2), pages 311-316.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Latent separability; Weak separability; Demand system; Exclusive goods; Price variation; SL prices;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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