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A Linear Expenditure System with Adjustment Costs

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  • KENNETH W. CLEMENTS
  • MERRAN EVANS
  • DUNCAN S. IRONMONGER
  • ALAN A. POWELL

Abstract

This paper develops a new dynamic version of the linear expenditure system. The dynamics derive from the utility function specification which includes an adjustment cost term. As a result, the consumer is less likely to fine‐tune his consumption pattern—the substitution effects of small price changes are zero. The issue of the discrimination between this model of habit persistence and the Pollak and Wales habit formation model is discussed in some detail. Some preliminary estimates of the model are reported; these estimates were obtained using a quarterly Australian data base in which six commodities are individually distinguished.

Suggested Citation

  • Kenneth W. Clements & Merran Evans & Duncan S. Ironmonger & Alan A. Powell, 1978. "A Linear Expenditure System with Adjustment Costs," The Economic Record, The Economic Society of Australia, vol. 54(3), pages 321-333, December.
    • Handle: RePEc:bla:ecorec:v:54:y:1978:i:3:p:321-333
    DOI: 10.1111/j.1475-4932.1978.tb01634.x
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    References listed on IDEAS

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    1. Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
    2. Parks, Richard W, 1969. "Systems of Demand Equations: An Empirical Comparison of Alternative Functional Forms," Econometrica, Econometric Society, vol. 37(4), pages 629-650, October.
    3. Phlips, Louis, 1972. "A Dynamic Version of the Linear Expenditure Model," The Review of Economics and Statistics, MIT Press, vol. 54(4), pages 450-458, November.
    4. BARTEN, Anton P., 1969. "Maximum likelihood estimation of a complete system of demand equations," LIDAM Reprints CORE 34, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Lluch, Constantino, 1973. "The extended linear expenditure system," European Economic Review, Elsevier, vol. 4(1), pages 21-32, April.
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    Cited by:

    1. Kenneth W. Clements, 1976. "A Linear Allocation of Spending‐Power System:A Consumer Demand and Portfolio Model," The Economic Record, The Economic Society of Australia, vol. 52(2), pages 182-198, June.

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