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Regular and Estimable Inverse Demand Systems: A Distance Function Approach

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  • Gary K.K. Wong
  • Keith R. McLaren

    ()

Abstract

To be useful for realistic policy simulation in an environment of rapid structural change, inverse demand systems must remain regular over substantial variations in quantities. The distance function is a convenient vehicle for generating such systems. While it directly yields Hicksian inverse demand functions, those functions will not usually have an explicit representation in terms of the observable variables. Note however that this problem need not hinder estimation and could be solved by using the numerical inversion estimation approach. This paper develops the formal theory for using distance functions in this context, and demonstrates the operational feasibility of the method.

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Bibliographic Info

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 6/02.

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Length: 32 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:msh:ebswps:2002-6

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Keywords: Inverse Demands; Distance Functions; Numerical Inversion Estimation Method; Separability.;

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  1. Pollak, R.A. & Wales, T.J., 1989. "The Likelihood Dominance Criterion: A New Approach To Model Selection," UBC Departmental Archives 89-17, UBC Department of Economics.
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  6. Holt, Matthew T., 2002. "Inverse demand systems and choice of functional form," European Economic Review, Elsevier, vol. 46(1), pages 117-142, January.
  7. Richard C. Bishop & Matthew T. Holt, 2002. "A semiflexible normalized quadratic inverse demand system: an application to the price formation of fish," Empirical Economics, Springer, vol. 27(1), pages 23-47.
  8. Eales, James S. & Unnevehr, Laurian J., 1994. "The inverse almost ideal demand system," European Economic Review, Elsevier, vol. 38(1), pages 101-115, January.
  9. Barten, A. P. & Bettendorf, L. J., 1989. "Price formation of fish : An application of an inverse demand system," European Economic Review, Elsevier, vol. 33(8), pages 1509-1525, October.
  10. Richard Blundell & Robin, J M, 1995. "Latent separability: grouping goods without weak separability," IFS Working Papers W95/09, Institute for Fiscal Studies.
  11. Perroni, Carlo & Rutherford, Thomas F., 1995. "Regular flexibility of nested CES functions," European Economic Review, Elsevier, vol. 39(2), pages 335-343, February.
  12. Selvanathan, Saroja, 1991. "The Reliability of ML Estimators of Systems of Demand Equations: Evidence from OECD Countries," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 346-53, May.
  13. Brown, Mark G & Lee, Jonq-Ying & Seale, James L, Jr, 1995. "A Family of Inverse Demand Systems and Choice of Functional Form," Empirical Economics, Springer, vol. 20(3), pages 519-30.
  14. Cooper, Russel J. & McLaren, Keith R. & Wong, Gary K. K., 2001. "On the empirical exploitation of consumers' profit functions in static analyses," Economics Letters, Elsevier, vol. 72(2), pages 181-187, August.
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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 12/02, Monash University, Department of Econometrics and Business Statistics.

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