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Estimating a third-order translog demand system using Canadian micro-data

Listed author(s):
  • Vik Singh

    (University of Regina)

This paper presents a flexible functional form called third-order translog, which includes higher-order terms, to estimate systems of budget-share equations using Canadian crosssectional micro-data. We test the statistical significance of the third-order terms, and also test regularity conditions such as homogeneity and symmetry restrictions of the budgetshare systems. It is important to test these restrictions, since their rejection might imply that our data does not support the theory of utility maximization or the particular functional form used in the model is flawed. We find that the third-order terms are statistically significant which means that they are important determinant of consumer demand. But we reject the regularity conditions for most of the demographic groups. We also find that our model suffers from heteroscedastic errors and repeat the tests using “Heteroscedastic Consistent Covariance Matrix Estimator (HCCME).” The third-order terms are once again found to be significant but the regularity conditions fail to hold for all the demographic groups. The rejection of regularity conditions indicate a need for proper aggregation restrictions and determining the “neighborhood” of the observation space where the regularity conditions can hold.

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File URL: http://econwpa.repec.org/eps/em/papers/0512/0512011.pdf
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Paper provided by EconWPA in its series Econometrics with number 0512011.

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Length: 17 pages
Date of creation: 27 Dec 2005
Handle: RePEc:wpa:wuwpem:0512011
Note: Type of Document - pdf; pages: 17
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
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  1. Parks, Richard W, 1969. "Systems of Demand Equations: An Empirical Comparison of Alternative Functional Forms," Econometrica, Econometric Society, vol. 37(4), pages 629-650, October.
  2. Pollak, Robert A & Wales, Terence J, 1978. "Estimation of Complete Demand Systems from Household Budget Data: The Linear and Quadratic Expenditure Systems," American Economic Review, American Economic Association, vol. 68(3), pages 348-359, June.
  3. Barten, Anton P, 1977. "The Systems of Consumer Demand Functions Approach: A Review," Econometrica, Econometric Society, vol. 45(1), pages 23-51, January.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
  5. Nicol, C J, 1987. "The Implications of a Third-Order Translog Demand System and Some Empirical Results," Empirical Economics, Springer, vol. 12(3), pages 197-202.
  6. Simmons, Peter & Weiserbs, Daniel, 1979. "Translog Flexible Functional Forms and Associated Demand Systems," American Economic Review, American Economic Association, vol. 69(5), pages 892-901, December.
  7. Strauss, John, 1982. "Determinants of food consumption in rural Sierra Leone : Application of the quadratic expenditure system to the consumption-leisure component of a household-firm model," Journal of Development Economics, Elsevier, vol. 11(3), pages 327-353, December.
  8. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-383, June.
  9. Brown, Alan & Deaton, Angus S, 1972. "Surveys in Applied Economics: Models of Consumer Behaviour," Economic Journal, Royal Economic Society, vol. 82(328), pages 1145-1236, December.
  10. Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
  11. Deaton, Angus, 1986. "Demand analysis," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 30, pages 1767-1839 Elsevier.
  12. Christopher J. Nicol, 1991. "Aggregate Consumer Behaviour without Exact Aggregation," Canadian Journal of Economics, Canadian Economics Association, vol. 24(3), pages 578-594, August.
  13. Berndt, Ernst R & Darrough, Masako N & Diewert, W E, 1977. "Flexible Functional Forms and Expenditure Distributions: An Application to Canadian Consumer Demand Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(3), pages 651-675, October.
  14. Blundell, Richard, 1988. "Consumer Behaviour: Theory and Empirical Evidence--a Survey," Economic Journal, Royal Economic Society, vol. 98(389), pages 16-65, March.
  15. Barnes, Roberta & Gillingham, Robert, 1984. "Demographic Effects in Demand Analysis: Estimation of the Quadratic Expenditure System Using Microdata," The Review of Economics and Statistics, MIT Press, vol. 66(4), pages 591-601, November.
  16. Hayes, Kathy J, 1986. "Third-Order Translog Utility Functions," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 339-346, July.
  17. Nicol, Christopher J., 1993. "Testing exact aggregation in income and household characteristics: the effects of aggregation across goods," Ricerche Economiche, Elsevier, vol. 47(4), pages 385-406, December.
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