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Coherent Specification Of Demand Systems With Corner Solutions And Endogenous Regimes

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  • VAN SOEST, A.
  • KOOREMAN, P.
  • KAPTEYN, A.

Abstract

We seek to provide fairly general conditions that may be imposed on parameters in order that any empirical consumer demand system is consistent with utility maximization. In standard demand systems the imposition of these regularity conditions is less essential than in more complex situations, like when there is rationing or when there are endogenously switching regimes. The paper starts out by giving a number of examples where the failure to properly take into account restrictions following from neoclassical theory leads to models that are not internally coherent. Let 0 be the space of parameters which generate internally coherent models. We show that even if the true parameter vector belongs to 0, failure to constrain the parameter estimates to 0 in "maximum likelihood" estimation may yield inconsistent estimates outside of 0. Next a general framework is provided in which it is possible to formulate parameter restrictions which guarantee utility consistent models. For various cases (standard demand systems, rationing, endogenous regimes) we suggest general conditions that can be imposed in order to guarantee coherency of the empirical model. Since random parameter variation is allowed for, to capture non-systematic differences in preferences across individuals, the conditions also imply restrictions on the stochastic specification of an empirical model. For a number of familiar demand systems we show what the parameter restrictions amount to in practice.
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Suggested Citation

  • Van Soest, A. & Kooreman, P. & Kapteyn, A., 1988. "Coherent Specification Of Demand Systems With Corner Solutions And Endogenous Regimes," The Warwick Economics Research Paper Series (TWERPS) 302, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:302
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/1978-1988/twerp302.pdf
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    Cited by:

    1. Kapteyn, Arie & Kooreman, Peter & van Soest, Arthur, 1990. "Quantity Rationing and Concavity in a Flexible Household Labor Supply Model," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 55-62, February.
    2. Symons, Elizabeth & Walker, Ian, 1989. "The Revenue and Welfare Effects of Fiscal Harmonization for the UK," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 5(2), pages 61-75, Summer.
    3. van Soest, A.H.O., 1990. "Essays on micro-econometric models of consumer demand and the labour market," Other publications TiSEM be045d62-a73d-4d7c-a591-f, Tilburg University, School of Economics and Management.

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