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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," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182827, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae14:182827
    DOI: 10.22004/ag.econ.182827
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    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;

    JEL classification:

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

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