Testing non-nested demand relations: linear expenditure system versus indirect addilog
In applied economic research computable general equilibrium [CGE] models in which the behavior of economic agents are modeled, are widely used. In many CGE models, the Linear Expenditure System [LES] is used to model behavior of the household sector. The disadvantage of LES is that the Engel curves, describing the relationship between expenditure on a certain commodity and total expenditure, are straight lines. Moreover, the LES does not allow for the existence of inferior commodities, elastic demand and gross substitution. An alternative model for the household block is the Indirect Addilog System [IAS] which is as simple to implement as LES, but which does not suffer from these theoretical deficiencies. Consequently, IAS provides a theoretically richer description of household behavior than LES, while it is as easy to implement. In this paper we test the LES specification against the IAS specification in case one disposes of a budget survey. It is not possible to use a standard likelihood ratio test as both models are not nested. We propose to use the likelihood ratio test for non-nested hypotheses due to Vuong (1989), or, alternatively, the distribution-free test due to Clarke (2007). We apply both tests to the Palestinian Expenditure and Consumption Survey (PECS, 2005) and find that there is overwhelming evidence that the IAS specification is to be preferred to the LES specification.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 63 (2009)
Issue (Month): 3 ()
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0039-0402|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0039-0402|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hanoch, Giora, 1975. "Production and Demand Models with Direct or Indirect Implicit Additivity," Econometrica, Econometric Society, vol. 43(3), pages 395-419, May.
- Lejour, Arjan & Rojas-Romagosa, Hugo & Verweij, Gerard, 2008.
"Opening services markets within Europe: Modelling foreign establishments in a CGE framework,"
Elsevier, vol. 25(5), pages 1022-1039, September.
- Hugo ROJAS-ROMAGOSA & Arjan LEJOUR & Gerard VERWEIJ, "undated". "Opening Services Markets within Europe: Modelling Foreign Establishments in a CGE Framework," EcoMod2008 23800117, EcoMod.
- Arjan Lejour & Hugo Rojas-Romagosa & Verweij. G., 2007. "Opening services markets within Europe; modelling foreign establishments in a CGE framework," CPB Discussion Paper 80, CPB Netherlands Bureau for Economic Policy Analysis.
- Somermeyer, W. H. & Langhout, A., 1972. "Shapes of Engel curves and demand curves: Implications of the expenditure allocation model, applied to Dutch data," European Economic Review, Elsevier, vol. 3(3), pages 351-386, November.
- Arjan Lejour & Paul Veenendaal & Gerard Verweij & Nico van Leeuwen, 2006. "Worldscan; a model for international economic policy analysis," CPB Document 111, CPB Netherlands Bureau for Economic Policy Analysis.
- C. E. V. Leser, 1941. "Family Budget Data and Price-Elasticities of Demand," Review of Economic Studies, Oxford University Press, vol. 9(1), pages 40-57.
- Clarke, Kevin A., 2007. "A Simple Distribution-Free Test for Nonnested Model Selection," Political Analysis, Cambridge University Press, vol. 15(03), pages 347-363, June.
- F. J. H. Don & J. P. Verbruggen, 2006. "Models and methods for economic policy: 60 years of evolution at CPB," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 60(2), pages 145-170.
- Henk Don & Johan Verbruggen, 2006. "Models and methods for economic policy; 60 years of evolution at CPB," CPB Discussion Paper 55, CPB Netherlands Bureau for Economic Policy Analysis.
- Jeffrey Reimer & Thomas Hertel, 2004. "Estimation of International Demand Behaviour for Use with Input-Output Based Data," Economic Systems Research, Taylor & Francis Journals, vol. 16(4), pages 347-366.
- Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, November.
- Murty, K N, 1982. "Theoretical Restrictions on the Parameters of Indirect Addilog Demand Equations-A Comment," Econometrica, Econometric Society, vol. 50(1), pages 225-227, January. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:bla:stanee:v:63:y:2009:i:3:p:368-384. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.