Modeling Household Behavior in a CGE Model: Linear Expenditure System or Indirect Addilog?
We try to argue that in a computable general equilibrium model, household preferences should be modeled by the indirect addilog system (IAS), exhibiting constant differences of elasticity of substitution (CDES), rather than by the frequently used linear expenditure system (LES). Both systems have the same data requirement and are as easy to implement, but IAS provides for a richer description of preferences. Contrarily to LES, its Engel curves are non-linear and it allows for inferior commodities, elastic demand and gross substitution. LES assigns zero utility to households with expenditure below a positive minimum value, whereas IAS assigns a positive utility, provided zero expenditure is replaced by a small positive number. In micro simulation models where the results of a macro CGE model (with one representative household) are used at micro level, this constitutes a clear advantage of IAS. In the framework of an expenditure survey, we find overwhelming statistical evidence that the IAS indirect utility function is likely to be (much) closer to the true indirect utility function than LES. Consequently, expenditure elasticities and welfare changes are likely to be (much) better estimated by IAS. Simulations with a CGE model for Palestine show that price responses and equivalent variation are considerably higher for IAS than for LES.
|Date of creation:||Sep 2010|
|Contact details of provider:|| Postal: Niels Bohrs Vej 9, 6700 Esbjerg|
Phone: +45 6550 2233
Fax: +45 6550 1090
Web page: http://degit.sam.sdu.dk/
More information through EDIRC
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.:
- Marco Missaglia & Paul de Boer, 2004.
"Food-For-Work versus Cash-For-Work: Emergency Assistance in Palestine,"
Economic Systems Research,
Taylor & Francis Journals, vol. 16(4), pages 367-390.
- MISSAGLIA Marco & DE BOER Paul, "undated". "Food-For-Work versus Cash-For-Work: Emergency Assistance in Palestine," EcoMod2003 330700104, EcoMod.
- Hanoch, Giora, 1975. "Production and Demand Models with Direct or Indirect Implicit Additivity," Econometrica, Econometric Society, vol. 43(3), pages 395-419, May.
- Paul de Boer & Richard Paap, 2009. "Testing non-nested demand relations: linear expenditure system versus indirect addilog," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 63(3), pages 368-384.
- de Boer, P.M.C. & Paap, R., 2009. "Testing Non-nested Demand Relations: Linear Expenditure System versus Indirect Addilog," Econometric Institute Research Papers EI 2009-07, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Heij, Christiaan & de Boer, Paul & Franses, Philip Hans & Kloek, Teun & van Dijk, Herman K., 2004. "Econometric Methods with Applications in Business and Economics," OUP Catalogue, Oxford University Press, number 9780199268016, April.
- 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.
- John Cranfield & Paul Preckel & James Eales & Thomas Hertel, 2000. "On the estimation of 'an implicitly additive demand system'," Applied Economics, Taylor & Francis Journals, vol. 32(15), pages 1907-1915.
- Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
- 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.
- Paul de Boer & Marco Missaglia, 2006. "Economic consequences of intifada," Economic Systems Research, Taylor & Francis Journals, vol. 18(1), pages 97-106.
- de Boer, P.M.C. & Missaglia, M., 2005. "Economic consequences of intifada," Econometric Institute Research Papers EI 2005-21, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- 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, January.
- 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:deg:conpap:c015_059. 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: (Jan Pedersen)
If references are entirely missing, you can add them using this form.