The Rank of a System of Engel Curves. How Many Common Factors?
AbstractBy representing a system of budget shares as an approximate factor model we determine its rank, i.e. the number of common functional forms, or factors, spanning the space of Engel curves. Once the common factors are estimated via approximate principal components, we identify them by imposing statistical independence. Finally, by means of parametric and non-parametric regressions we estimate the factors as functions of total expenditure. Using data from the U.K. Consumption Expenditure Survey from 1968 to 2006, we find evidence of three common functional forms which correspond to decreasing, increasing and almost constant Engel curves. The household consumption behavior is therefore driven by three factors respectively related to necessities (e.g. food), luxuries (e.g. vehicles), and goods to which is allocated the same percentage of total budget both in rich and in poor households (e.g. housing).
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Bibliographic InfoPaper provided by Max Planck Institute of Economics, Evolutionary Economics Group in its series Papers on Economics and Evolution with number 2011-01.
Date of creation: 27 Jan 2011
Date of revision:
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-05 (All new papers)
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