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Towards A More General Approach To Testing The Time Additivity Hypothesis

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Author Info
Gary Wong
Abstract

A new procedure is proposed for re-examining the assumption of additivity of preferences over time which, although untenable, is usually maintained in intertemporal analyses of consumption and labour supply. The method is an extension of a famous work by Browning (1991). However, it is more general in permitting the estimation of Frisch demands, which are explicit in an unobservable variable (price of utility), but may lack a closed form representation in terms of observable variables such as prices and total outlay. It also makes an extensive use of duality theory to solve the endogeneity problem encountered in Browning\'s study. Applying this method with an appropriate estimator to the Australian disaggregate data, we find that the intertemporal additivity hypothesis is decisively rejected, which is consistent with Browning\'s conclusion. Results also indicate that the effects of lagged and future prices in determining current consumption decisions are insubstantial.

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Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 098.

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Date of creation: 20 Sep 2001
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Handle: RePEc:qut:dpaper:098

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Related research
Keywords: Frisch Demands; The SNAP Structure; Intertemporal Additivity Hypothesis;

Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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  1. Rimmer, Maureen T & Powell, Alan A, 1996. "An Implicitly Additive Demand System," Applied Economics, Taylor and Francis Journals, vol. 28(12), pages 1613-22, December. [Downloadable!] (restricted)
  2. Beach, Charles M & MacKinnon, James G, 1979. "Maximum Likelihood Estimation of Singular Equation Systems with Autoregressive Disturbances," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 459-64, June. [Downloadable!] (restricted)
    Other versions:
  3. Spinnewyn, Frans, 1981. "Rational habit formation," European Economic Review, Elsevier, vol. 15(1), pages 91-109. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Cooper, Russel J & McLaren, Keith R, 1980. "Atemporal, Temporal and Intertemporal Duality in Consumer Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 599-609, October. [Downloadable!] (restricted)
  6. Pollak, Robert A & Wales, Terrence J, 1969. "Estimation of the Linear Expenditure System," Econometrica, Econometric Society, vol. 37(4), pages 611-28, October. [Downloadable!] (restricted)
  7. Martin J. Browning, 1989. "The Intertemporal Allocation of Expenditure on Non-durables, Services, and Durables," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 22-36, February. [Downloadable!] (restricted)
  8. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju. [Downloadable!] (restricted)
  9. Pashardes, Panos, 1986. "Myopic and Forward Looking Behavior in a Dynamic Demand System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 387-97, June. [Downloadable!] (restricted)
  10. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June. [Downloadable!] (restricted)
  11. Deaton, Angus, 1986. "Demand analysis," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 30, pages 1767-1839 Elsevier. [Downloadable!] (restricted)
  12. Bover, Olympia, 1991. "Relaxing Intertemporal Separability: A Rational Habits Model of Labor Supply Estimated from Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 85-100, January. [Downloadable!] (restricted)
  13. Cooper, Russell J., 1996. "Optimal consumption-wealth relationships derived by consumer intertemporal profit maximisation," Economics Letters, Elsevier, vol. 50(3), pages 341-347, March. [Downloadable!] (restricted)
  14. Browning, Martin, 1997. "Interpreting the results of empirical analyses of intertemporal allocation: An identification problem," Economics Letters, Elsevier, vol. 56(1), pages 41-44, September. [Downloadable!] (restricted)
  15. Cooper, Russel J & McLaren, Keith R, 1993. "Approaches to the Solution of Intertemporal Consumer Demand Models," Australian Economic Papers, Blackwell Publishing, vol. 32(60), pages 20-39, June.
  16. David De La Croix & Jean-Pierre Urbain, 1998. "Intertemporal substitution in import demand and habit formation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(6), pages 589-612. [Downloadable!]
    Other versions:
  17. Russel J. Cooper & Keith R. McLaren, 1992. "An Empirically Oriented Demand System with Improved Regularity Properties," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 652-68, August. [Downloadable!] (restricted)
  18. Kim, H Youn, 1993. "Frisch Demand Functions and Intertemporal Substitution in Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 445-54, August. [Downloadable!] (restricted)
  19. Cooper, Russel J., 1994. "On the exploitation of additional duality relationships in consumer demand analysis," Economics Letters, Elsevier, vol. 44(1-2), pages 73-77. [Downloadable!] (restricted)
  20. Browning, Martin, 1991. "A Simple Nonadditive Preference Structure for Models of Household Behavior over Time," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 607-37, June. [Downloadable!] (restricted)
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