IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v50y2016i2d10.1007_s00181-015-0939-6.html
   My bibliography  Save this article

Biases in consumer elasticities based on micro and aggregate data: an integrated framework and empirical evaluation

Author

Listed:
  • Frank T. Denton

    (McMaster University)

  • Dean C. Mountain

    (McMaster University)

Abstract

Policy analysis frequently requires estimates of aggregate (or mean) consumer elasticities. However, estimates are often made incorrectly, based on elasticity calculations at mean income. We provide in this paper an overall integrated analytical framework that encompasses these biases and others. We then use empirically derived parameter estimates to simulate and quantify the full range of biases. We do that for alternative income distributions and four different demand models. The biases can be quite large; they generally grow as the degree of income inequality rises, the underlying expenditure elasticity differs from one, and the rank of the model increases.

Suggested Citation

  • Frank T. Denton & Dean C. Mountain, 2016. "Biases in consumer elasticities based on micro and aggregate data: an integrated framework and empirical evaluation," Empirical Economics, Springer, vol. 50(2), pages 531-560, March.
    • Handle: RePEc:spr:empeco:v:50:y:2016:i:2:d:10.1007_s00181-015-0939-6
    DOI: 10.1007/s00181-015-0939-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00181-015-0939-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00181-015-0939-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stoker, Thomas M, 1984. "Completeness, Distribution Restrictions, and the Form of Aggregate Functions," Econometrica, Econometric Society, vol. 52(4), pages 887-907, July.
    2. Arthur Lewbel, 2003. "A rational rank four demand system," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 127-135.
    3. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    4. Lewbel, Arthur, 1990. "Income distribution movements and aggregate money illusion," Journal of Econometrics, Elsevier, vol. 43(1-2), pages 35-42.
    5. Blundell, Richard & Meghir, Costas & Weber, Guglielmo, 1993. "Aggregation and consumer behaviour: some recent results," Ricerche Economiche, Elsevier, vol. 47(3), pages 235-252, September.
    6. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-383, June.
    7. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-597, June.
    8. 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.
    9. O'Higgins, Michael & Schmaus, Guenther & Stephenson, Geoffrey, 1989. "Income Distribution and Redistribution: A Microdata Analysis for Seven Countries," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 35(2), pages 107-131, June.
    10. Frank T. Denton & Dean C. Mountain, 2004. "Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 613-628, August.
    11. Howe, Howard & Pollak, Robert A & Wales, Terence J, 1979. "Theory and Time Series Estimation of the Quadratic Expenditure System," Econometrica, Econometric Society, vol. 47(5), pages 1231-1247, September.
    12. Terence J. Wales, 1971. "A Generalized Linear Expenditure Model of the Demand for Non-durable Goods in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 4(4), pages 471-484, November.
    13. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    14. Pollak, Robert A & Wales, Terence J, 1978. "Estimation of Complete Demand Systems from Household Budget Data: The Linear and Quadratic Expenditure Systems," American Economic Review, American Economic Association, vol. 68(3), pages 348-359, June.
    15. 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.
    16. Slottje, Daniel, 2008. "Estimating demand systems and measuring consumer preferences," Journal of Econometrics, Elsevier, vol. 147(2), pages 207-209, December.
    17. Mchel O'Higgins & Guenther Schmaus & Geofrey Stephenson, 1989. "Income Distribution And Redistribution: A Microdata Analysis For Seven Countries," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 35(2), pages 107-131, June.
    18. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-795, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Olabisi, Michael & Tschirley, David L. & Nyange, David & Awokuse, Titus, 2018. "The Challenge of Substituting Sunflower Oil for Imported Palm Oil: Evidence from Tanzania," Feed the Future Innovation Lab for Food Security Policy Research Papers 275677, Michigan State University, Department of Agricultural, Food, and Resource Economics, Feed the Future Innovation Lab for Food Security (FSP).
    2. Olabisi, Michael & Tschirley, David L. & Nyange, David & Awokuse, Titus, 2019. "Energy demand substitution from biomass to imported kerosene: Evidence from Tanzania," Energy Policy, Elsevier, vol. 130(C), pages 243-252.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frank T. Denton & Dean C. Mountain, 2011. "Aggregation and Other Biases in the Calculation of Consumer Elasticities for Models of Arbitrary Rank," Quantitative Studies in Economics and Population Research Reports 447, McMaster University.
    2. Frank Denton & Dean Mountain, 2014. "The implications of mean scaling for the calculation of aggregate consumer elasticities," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(3), pages 297-314, September.
    3. 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.
    4. Denton, Frank T. & Mountain, Dean C., 2011. "Exploring the effects of aggregation error in the estimation of consumer demand elasticities," Economic Modelling, Elsevier, vol. 28(4), pages 1747-1755, July.
    5. Frank T. Denton & Dean C. Mountain, 2007. "Exploring the Effects of Aggregation Error in the Estimation of Consumer Demand Elasticities," Social and Economic Dimensions of an Aging Population Research Papers 226, McMaster University.
    6. Frank T. Denton & Dean C. Mountain & Byron G Spencer, 2006. "Errors of aggregation and errors of specification in a consumer demand model: a theoretical note," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(4), pages 1398-1407, November.
    7. Frank T. Denton & Dean C. Mountain, 2004. "Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 613-628, August.
    8. Bente Halvorsen, 2006. "When can micro properties be used to predict aggregate demand?," Discussion Papers 452, Statistics Norway, Research Department.
    9. Lyssiotou, Panayiota & Pashardes, Panos & Stengos, Thanasis, 2002. "Nesting quadratic logarithmic demand systems," Economics Letters, Elsevier, vol. 76(3), pages 369-374, August.
    10. LaFrance, Jeffrey T., 2008. "The structure of US food demand," Journal of Econometrics, Elsevier, vol. 147(2), pages 336-349, December.
    11. Bente Halvorsen & Bodil M. Larsen, 2008. "The Role of Heterogeneous Demand for Temporal and Structural Aggregation Bias," Discussion Papers 537, Statistics Norway, Research Department.
    12. Simona Bigerna & Carlo Andrea Bollino & Maria Chiara D’Errico, 2020. "A general expenditure system for estimation of consumer demand functions," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 37(3), pages 1071-1088, October.
    13. Knobel, Alexander (Кнобель, Александр) & Chentsov, Alexander (Ченцов, Александр), 2018. "The Impact of Exchange Rates and Their Volatility on Russia's Foreign Trade, Taking into Account its Membership in EAEU [Влияние Обменных Курсов И Их Волатильности На Внешнюю Торговлю России С Учет," Working Papers 061824, Russian Presidential Academy of National Economy and Public Administration.
    14. 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.
    15. Giorgio Fagiolo, 2001. "Engel Curves Specification in an Artificial Model of Consumption Dynamics with Socially Evolving Preferences," LEM Papers Series 2001/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    16. Chen, Shu-Ling & Chern, Wen S. & Lin, Yi-Ru & Liu, Kang Ernest, 2015. "Effects of food safety and health risk information on demand for food in Taiwan," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205452, Agricultural and Applied Economics Association.
    17. Xavier Labandeira & José M. Labeaga & Miguel Rodríguez, 2006. "A Residential Energy Demand System for Spain," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 87-112.
    18. Paula Carvalho Pereda & Denisard Cneio de Oliveira Alves, 2008. "Demand for Nutrients in Brazil," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211136590, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    19. Toshinobu Matsuda, 2006. "A trigonometric flexible consumer demand system," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 145-162, February.
    20. Douglas Fisher & Adrian R. Fleissig & Apostolos Serletis, 2006. "An Empirical Comparison of Flexible Demand System Functional Forms," World Scientific Book Chapters, in: Money And The Economy, chapter 13, pages 247-277, World Scientific Publishing Co. Pte. Ltd..

    More about this item

    Keywords

    Aggregate consumer elasticities; Aggregation bias; Consumer demand; Income inequality; Income distribution; Model rank;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:50:y:2016:i:2:d:10.1007_s00181-015-0939-6. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.