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Aggregation and Other Biases in the Calculation of Consumer Elasticities for Models of Arbitrary Rank


  • Frank T. Denton
  • Dean C. Mountain


Consumer-related policy decisions often require analysis of aggregate responses or mean elasticities. However, in practice these mean elasticities are seldom used. Mean elasticities can be approximated using aggregate data, but that introduces aggregation bias for full and compensated price elasticities, though interestingly not for expenditure elasticities. The biases corresponding to incorrect approximations of mean elasticities depend on the type of data (micro or aggregate), the type and rank of the model, and generalized measures of income inequality. These biases are distinct from the biases (already noted in the literature) when using aggregate data to estimate micro elasticites at mean income.

Suggested Citation

  • 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.
  • Handle: RePEc:mcm:qseprr:447

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    References listed on IDEAS

    1. Lewbel, Arthur, 1990. "Income distribution movements and aggregate money illusion," Journal of Econometrics, Elsevier, vol. 43(1-2), pages 35-42.
    2. Blundell, Richard & Meghir, Costas & Weber, Guglielmo, 1993. "Aggregation and consumer behaviour: some recent results," Ricerche Economiche, Elsevier, vol. 47(3), pages 235-252, 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. 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.
    5. 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.
    6. Slottje, Daniel, 2008. "Estimating demand systems and measuring consumer preferences," Journal of Econometrics, Elsevier, vol. 147(2), pages 207-209, December.
    7. 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.
    8. 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.
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    Cited by:

    1. 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.

    More about this item


    Aggregate price and expenditure elasticities; aggregation bias; consumer demand; generalized measures of income inequality; income distribution;

    JEL classification:

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

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