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Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints

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  • Aaron Strong
  • V. Kerry Smith

Abstract

This paper has two objectives. First, we identify a problem with the ability of the discrete-continuous choice (DCC) framework and conditional demand functions to fully describe consumer preferences in the presence of kinked budget constraints. Second, we propose and illustrate an alternative, preference based, method for estimating consumer responses to price changes under these conditions. Our preference based approach yields price elasticities on the order of 0.4 and a "utilities expenditure" elasticity of near unity. This research highlights the possibility that households may be more sensitive to price schedules than previously thought. It is recognizes commitments to commodities such as pools or outdoor landscaping influence how water consumption responds to price changes as part of the long run adjustments.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14304.

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Date of creation: Sep 2008
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Publication status: published as Aaron Strong & V. Kerry Smith, 2010. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," Land Economics, University of Wisconsin Press, vol. 86(1), pages 173-190.
Handle: RePEc:nbr:nberwo:14304

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  24. Hausman, Jerry A., 1979. "The econometrics of labor supply on convex budget sets," Economics Letters, Elsevier, vol. 3(2), pages 171-174.
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