Consumer Demand—Empirical Analysis I

This chapter discusses empirical implementation of the systems of demand functions approach presented in the last two chapters. I address questions of functional form specification and statistical specification. The functional form question has been a long-standing issue in the area of consumer demand analysis. There are scores of functional forms and a comprehensive review on the possibilities, strengths, and weaknesses is not possible in this book. A brief review is given of the most significant functional forms in the literature. The approaches to functional form specification are based on: (i) direct derivation from the utility function, (ii) directly specified demand functions, (iii) derivation using duality theory applied to locally flexible functional forms, and (iv) derivation from globally flexible functional forms. The focus is on the two well-known workhorses in econometric analysis: the Rotterdam model (RM), and the almost ideal demand system (AIDS). Additional discussion centers on extensions of these two models to more general models which are currently finding popularity. These models include the CBS and NBER differential demand systems, and the EASI demand system.