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Exploring the Effects of Aggregation Error in the Estimation of Consumer Demand Elasticities

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Author Info
Frank T. Denton
Dean C. Mountain
Abstract

Errors introduced by using aggregate data in estimating a consumer demand model have long been a concern. We study the effects of such errors on elasticity estimates derived from AIDS and QUAIDS models. Based on a survey of published articles, a generic parameterization of the income distribution, and the range of Gini coefficients reported for 28 OECD countries, we generate and analyse a large number of “observations” on the differences between elasticities calculated at the aggregate level and those calculated at the micro level. We suggest a procedure for evaluating the likely range of aggregation error when a model is estimated with aggregate data.

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File URL: http://socserv2.socsci.mcmaster.ca/~sedap/p/sedap226.pdf
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Publisher Info
Paper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 226.

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Length: 38 pages
Date of creation: Dec 2007
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Handle: RePEc:mcm:sedapp:226

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Related research
Keywords: Aggregation error; Consumer demand elasticities; AIDS/QUAIDS models; Income distribution;

Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

This paper has been announced in the following NEP Reports:

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    Other versions:
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    Other versions:
  8. Frank T. Denton & Dean C. Mountain & Byron G Spencer, 2006. "Errors of aggregation and errors of specification in a consumer demand model: a theoretical note," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1398-1407, November. [Downloadable!] (restricted)
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  11. Jones, Andrew & Mazzi, Margherita Giannoni, 1996. "Tobacco Consumption and Taxation in Italy: An Application of the QUAIDS Model," Applied Economics, Taylor and Francis Journals, vol. 28(5), pages 595-603, May. [Downloadable!] (restricted)
  12. Denton, Frank T & Mountain, Dean C & Spencer, Byron G, 1999. "Age, Trend, and Cohort Effects in a Macro Model of Canadian Expenditure Patterns," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 430-43, October.
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  20. Frank Denton & Dean Mountain, 2004. "Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 613-628, August. [Downloadable!] (restricted)
    Other versions:
  21. Toshinobu Matsuda, 2006. "Linear approximations to the quadratic almost ideal demand system," Empirical Economics, Springer, vol. 31(3), pages 663-675, September. [Downloadable!] (restricted)
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