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Abstract

The econometric estimation of zero censored demand system faces major difficulties. The virtual price approach pioneered by Lee and Pitt (1986) in an econometric framework is theoretically consistent but empirically feasible only for homothetic demand system. It may even fail to converge depending on initial conditions. In this paper we propose to expand on this approach by relying on the generalized maximum entropy concept instead of the Maximum Likelihood paradigm. The former is robust to the error distribution while the latter must stick with a normality assumption. Accordingly the econometric specification of censored demand systems with virtual prices is made easier even with non homothetic preferences defined over several goods. Illustrative Monte Carlo sampling results show its relative performance.

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File URL: http://www.rennes.inra.fr/smart/Media/Working-papers/WP09-12
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Bibliographic Info

Paper provided by INRA UMR SMART in its series Working Papers SMART - LERECO with number 200912.

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Date of creation: 2009
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Handle: RePEc:rae:wpaper:200912

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Web page: http://www.rennes.inra.fr/smart_eng/publications/working_papers
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Related research

Keywords: censored demand system; virtual prices; generalised maximum entropy;

Find related papers by JEL classification:

• C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
• C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
• D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

This paper has been announced in the following NEP Reports:

• NEP-ALL-2009-07-11 (All new papers)
• NEP-ECM-2009-07-11 (Econometrics)

References

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1. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
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   • Moschini, GianCarlo, 1999. "Imposing Local Curvature Conditions in Flexible Demand System," Staff General Research Papers 1745, Iowa State University, Department of Economics.
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