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Accounting for differences in choice opportunities in analyses of energy expenditure

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    Zero expenditure poses several challenges when estimating demand systems. Zero expenditure on energy goods occur due to limited opportunity to consume the good or because the household chooses not to use all available equipment (corner solution). In this paper we develop a method to estimate an Almost Ideal Demand System (AIDS) of household energy demand simultaneously using a Maximum Likelihood approach. The multivariate density of energy expenditures depends on the consumption opportunity of the individual household. We model the choice of corner solutions by a stochastic Kuhn-Tucker condition, and distinguish between zero expenditure due to limited consumption opportunities and corner solutions by using a Double Hurdle model. We find that accounting for zero expenditure in the estimation has a significant effect on the estimated parameters. Assuming stochastic interdependence between expenditures on different energy goods within the household, in addition to accounting for zero expenditure, has only a minor effect on the estimated coefficients.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp400.pdf
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    Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 400.

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    Date of creation: Dec 2004
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    Handle: RePEc:ssb:dispap:400
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    1. repec:cup:cbooks:9780521296762 is not listed on IDEAS
    2. Michael Ransom, 1985. "A Comment on Consumer Demand Systems with Binding Non-Negativity Constraints," Working Papers 572, Princeton University, Department of Economics, Industrial Relations Section..
    3. Pashardes, Panos, 1993. "Bias in Estimating the Almost Ideal Demand System with the Stone Index Approximation," Economic Journal, Royal Economic Society, vol. 103(419), pages 908-15, July.
    4. Garcia, Jaume & Labeaga, Jose M, 1996. "Alternative Approaches to Modelling Zero Expenditure: An Application to Spanish Demand for Tobacco," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 489-506, August.
    5. Fry, Vanessa & Pashardes, Panos, 1994. "Abstention and Aggregation in Consumer Demand: Zero Tobacco Expenditures," Oxford Economic Papers, Oxford University Press, vol. 46(3), pages 502-18, July.
    6. Heien, Dale & Wessells, Cathy Roheim, 1990. "Demand Systems Estimation with Microdata: A Censored Regression Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 365-71, July.
    7. Carol Newman & Maeve Henchion & Alan Matthews, 2001. "A Double-Hurdle Model of Irish Household Expenditure on Prepared Meals," Trinity Economics Papers 200119, Trinity College Dublin, Department of Economics.
    8. M. Burton & M. Tomlinson & T. Young, 1994. "Consumers' Decisions Whether Or Not To Purchase Meat: A Double Hurdle Analysis Of Single Adult Households," Journal of Agricultural Economics, Wiley Blackwell, vol. 45(2), pages 202-212.
    9. Amemiya, Takeshi, 1974. "Multivariate Regression and Simultaneous Equation Models when the Dependent Variables Are Truncated Normal," Econometrica, Econometric Society, vol. 42(6), pages 999-1012, November.
    10. Cragg, John G, 1971. "Some Statistical Models for Limited Dependent Variables with Application to the Demand for Durable Goods," Econometrica, Econometric Society, vol. 39(5), pages 829-44, September.
    11. Deaton, Angus & Irish, Margaret, 1984. "Statistical models for zero expenditures in household budgets," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 59-80.
    12. Jane Fry & Tim Fry & Keith McLaren & Tanya Smith, 2001. "Modelling zeroes in microdata," Applied Economics, Taylor & Francis Journals, vol. 33(3), pages 383-392.
    13. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
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