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A rational rank four demand system

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  • Arthur Lewbel

    (Department of Economics, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA)

Abstract

Past parametric tests of demand system rank employed polynomial Engel curve systems. However, by Gorman's (1981) theorem, the maximum possible rank of a utility-derived polynomial demand system is three. The present paper proposes a class of demand systems that are utility derived, are close to polynomial, and have rank four. These systems nest rational polynomial demands, and so can be used to test ranks up to four. These systems are suitable for applications where high rank is likely, such as demand systems involving a large number of goods. A test of rank using this new class of systems is applied to UK consumer demand data. Copyright © 2002 John Wiley & Sons, Ltd.

Suggested Citation

  • Arthur Lewbel, 2003. "A rational rank four demand system," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 127-135.
    • Handle: RePEc:jae:japmet:v:18:y:2003:i:2:p:127-135
    DOI: 10.1002/jae.677
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    References listed on IDEAS

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    1. Lwebel Arthur & Perraudin William, 1995. "A Theorem on Portfolio Separation with General Preferences," Journal of Economic Theory, Elsevier, vol. 65(2), pages 624-626, April.
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