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Engel Flexibility in Household Budget Studies: Non-parametric Evidence versus Standard Functional Forms

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  • Maureen T. Rimmer
  • Alan A. Powell

Abstract

At 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 Info

Paper provided by Victoria University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number op-79.

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Date of creation: Jun 1994
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Handle: RePEc:cop:wpaper:op-79

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  1. Pollak, Robert A & Wales, Terence J, 1981. "Demographic Variables in Demand Analysis," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1533-51, November.
  2. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, Elsevier, vol. 21(3), pages 263-285, April.
  3. Muellbauer, John, 1977. "Testing the Barten Model of Household Composition Effects and the Cost of Children," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 87(347), pages 460-87, September.
  4. Maureen T. Rimmer & Alan A. Powell, 1992. "Demand Patterns Across the Development Spectrum: Estimates for the AIDADS System," Centre of Policy Studies/IMPACT Centre Working Papers, Victoria University, Centre of Policy Studies/IMPACT Centre op-75, Victoria University, Centre of Policy Studies/IMPACT Centre.
  5. 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, MIT Press, vol. 78(2), pages 359-64, May.
  6. Cooper, Russel J & McLaren, Keith R & Parameswaran, Priya, 1994. "A System of Demand Equations Satisfying Effectively Global Curvature Conditions," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 70(208), pages 26-35, March.
  7. Lee, Lung-Fei & Pitt, Mark M, 1986. "Microeconometric Demand Systems with Binding Nonnegativity Constraints: The Dual Approach," Econometrica, Econometric Society, Econometric Society, vol. 54(5), pages 1237-42, September.
  8. Ray, Ranjan, 1980. "Analysis of a Time Series of Household Expenditure Surveys for India," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 62(4), pages 595-602, November.
  9. Lewbel, Arthur, 1991. "The Rank of Demand Systems: Theory and Nonparametric Estimation," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 711-30, May.
  10. Maureen T. Rimmer & Alan A. Powell, 1992. "An Implicitly Directly Additive Demand System: Estimates for Australia," Centre of Policy Studies/IMPACT Centre Working Papers, Victoria University, Centre of Policy Studies/IMPACT Centre op-73, Victoria University, Centre of Policy Studies/IMPACT Centre.
  11. Russel J. Cooper & Keith R. McLaren, 1992. "An Empirically Oriented Demand System with Improved Regularity Properties," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 25(3), pages 652-68, August.
  12. Clements, Kenneth W & Selvanathan, Antony & Selvanathan, Saroja, 1996. "Applied Demand Analysis: A Survey," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 72(216), pages 63-81, March.
  13. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 312-26, June.
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Cited by:
  1. Alan A. Powell & Keith R. McLaren & K.R. Pearson & Maureen Rimmer, 2002. "Cobb-Douglas Utility - Eventually!," Monash Econometrics and Business Statistics Working Papers, Monash University, Department of Econometrics and Business Statistics 12/02, Monash University, Department of Econometrics and Business Statistics.

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