Engel Flexibility in Household Budget Studies: Non-parametric Evidence versus Standard Functional Forms
AbstractAt least since the mid-1970s, the emphasis in applied demand analysis has been on a flexible specification of substitution effects. Recent theoretical work by Cooper and McLaren (1992a, 1992b and 1996) and Cooper, McLaren and Parameswaran (1994) has put more emphasis on effectively globally regular systems which allow greater flexibility in the treatment of Engel effects. However, current empirical work continues to use a relatively inflexible treatment of Engel effects. Following Lewbel's (1991) lead, in the present paper we attempt to evaluate the need for a more flexible treatment by examining Engel effects in the Australian Household Expenditure Survey for 1988-89 from an agnostic position in which the form of the Engel response is entirely data-determined. We do this using non-parametric procedures in the statistical package S-Plus. Contrary to common practice (and confirming Lewbel's empirical results for U.K. and U.S. data), we find evidence of non-monotonic responses of budget shares with increasing income. This argues in favour of more flexible forms for Engel curves such as those explored in recent work by Cooper and McLaren (1996) and by Rimmer and Powell (1992a, 1992b and 1996). Using the same methodology, we also carry out a brief exploration of the influence of demographic effects on household Engel responses.
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Bibliographic InfoPaper provided by Monash University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number op-79.
Date of creation: Jun 1994
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Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
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- Maureen T. Rimmer & Alan A. Powell, 1992. "An Implicitly Directly Additive Demand System: Estimates for Australia," Centre of Policy Studies/IMPACT Centre Working Papers op-73, Monash University, Centre of Policy Studies/IMPACT Centre.
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- Muellbauer, John, 1977. "Testing the Barten Model of Household Composition Effects and the Cost of Children," Economic Journal, Royal Economic Society, vol. 87(347), pages 460-87, September.
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- Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
- Lee, Lung-Fei & Pitt, Mark M, 1986. "Microeconometric Demand Systems with Binding Nonnegativity Constraints: The Dual Approach," Econometrica, Econometric Society, vol. 54(5), pages 1237-42, September.
- Cooper, Russel J & McLaren, Keith R, 1996. "A System of Demand Equations Satisfying Effectively Global Regularity Conditions," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 359-64, May.
- Ray, Ranjan, 1980. "Analysis of a Time Series of Household Expenditure Surveys for India," The Review of Economics and Statistics, MIT Press, vol. 62(4), pages 595-602, November.
- Clements, Kenneth W & Selvanathan, Antony & Selvanathan, Saroja, 1996. "Applied Demand Analysis: A Survey," The Economic Record, The Economic Society of Australia, vol. 72(216), pages 63-81, March.
- Russel J. Cooper & Keith R. McLaren, 1992. "An Empirically Oriented Demand System with Improved Regularity Properties," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 652-68, August.
- Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
- Alan A. Powell & Keith R. McLaren & K.R. Pearson & Maureen Rimmer, 2002.
"Cobb-Douglas Utility - Eventually!,"
Monash Econometrics and Business Statistics Working Papers
12/02, Monash University, Department of Econometrics and Business Statistics.
- Alan A. Powell & Keith R. McLaren & K.R. Pearson & Maureen Rimmer, 2002. "Cobb-Douglas Utility - Eventually!," Centre of Policy Studies/IMPACT Centre Working Papers ip-80, Monash University, Centre of Policy Studies/IMPACT Centre.
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