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Aggregation with price variation and heterogeneity across consumers

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  • Bente Halvorsen
  • Bodil M. Larsen

    ()
    (Statistics Norway)

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    Abstract

    In the aggregation literature, prices and price and income derivatives are often assumed not to vary across consumers. These assumptions may not be fulfilled: prices often vary and consumers are heterogeneous in the way they respond to price and income changes. In this paper we develop and illustrate a framework for consistent aggregation over consumers within an Almost Ideal Demand System (AIDS) model where prices, total expenditure and the response to these variables vary across consumers. We show how the frameworks previously discussed in the literature on aggregation of an AIDS model may be written as a special case within this general framework. The method may easily be adapted to any functional form.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp489.pdf
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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 489.

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    Date of creation: Nov 2006
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    Handle: RePEc:ssb:dispap:489

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    Keywords: Aggregation; Consumer demand; Heterogeneity;

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    1. 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.
    2. Denton, Frank T. & Mountain, Dean C., 2001. "Income distribution and aggregation/disaggregation biases in the measurement of consumer demand elasticities," Economics Letters, Elsevier, vol. 73(1), pages 21-28, October.
    3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    4. Lau, Lawrence J. & Wu, Ho-Mou, 1996. "Exact aggregation under summability and homogeneity with individually variable prices," Economics Letters, Elsevier, vol. 50(3), pages 329-335, March.
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    Cited by:
    1. Bente Halvorsen & Bodil M. Larsen, 2008. "The Role of Heterogeneous Demand for Temporal and Structural Aggregation Bias," Discussion Papers 537, Research Department of Statistics Norway.

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