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Is utility additive? The case of alcohol

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  • K.W. Clements
  • W. Yang
  • S.W. Zheng

Abstract

The hypothesis of additive utility (or preference independence) is often applied to the demand for broad aggregates. Recent testing provides some evidence favourable to the hypothesis, thus overturning the older results based on the standard asymptotic tests which are seriously biased against the null in small samples. Using data for seven countries and a variety of tests, this paper shows that preference independence also cannot be rejected for more narrowly defined commodities - beer, wine and spirits. The implications of the results for efficient taxation of alcoholic beverages are also explored.
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Suggested Citation

  • K.W. Clements & W. Yang & S.W. Zheng, 1997. "Is utility additive? The case of alcohol," Economics Discussion / Working Papers 97-02, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:97-02
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    References listed on IDEAS

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    1. Selvanathan, Saroja, 1987. "A Monte Carlo test of preference independence," Economics Letters, Elsevier, vol. 25(3), pages 259-261.
    2. E. A. Selvanathan, 1991. "Further Results on Aggregation of Differential Demand Equations," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 799-805.
    3. Clements, Kenneth W & Selvanathan, Saroja, 1994. "Understanding Consumption Patterns," Empirical Economics, Springer, vol. 19(1), pages 69-110.
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    6. William A. Barnett, 1979. "Theoretical Foundations for the Rotterdam Model," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 109-130.
    7. E.A. Selvanathan, 1991. "A Cross-Country Alcohol Consumption Comparison: An application of the Rotterdam demand system," Economics Discussion / Working Papers 91-04, The University of Western Australia, Department of Economics.
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