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Distribution of preferences and measurement errors in a disaggregated expenditure system

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  • Jørgen Aasness
  • Erik Biørn
  • Terje Skjerpen

Abstract

A complete system of consumer expenditure functions with 28 commodities is modeled and estimated by means of two-wave household panel data. The total consumption expenditure is treated as latent, with two income measures as observed indicators. The distribution of latent individual differences, interpreted as preference variation, is structured by a factor-analytic approach. Absence of measurement error in total expenditure is clearly rejected, as is also the standard assumption of uncorrelated measurement errors. The 2015 first-and second-order moments of the observed variables are modeled by means of 213 parameters in a reference model. Their maximum likelihood estimates have, with only a few exceptions, the expected sign and a reasonable magnitude. A notable finding is positive correlation between measurement errors of commodities belonging to major groups, e.g. foods, which may be explained by rational shopping behavior. The magnitude and ranking of the Engel elasticity estimates are not sensitive to whether the Engel functions are linear or quadratic. Copyright Royal Economic Society, 2003

Suggested Citation

  • Jørgen Aasness & Erik Biørn & Terje Skjerpen, 2003. "Distribution of preferences and measurement errors in a disaggregated expenditure system," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 374-400, December.
    • Handle: RePEc:ect:emjrnl:v:6:y:2003:i:2:p:374-400
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    Cited by:

    1. Jørgen Aasness & Odd Erik Nygård, 2009. "Revenue functions and Dupuit curves for indirect taxes with cross-border shopping," Discussion Papers 573, Statistics Norway, Research Department.
    2. Meijer, Erik & Spierdijk, Laura & Wansbeek, Tom, 2017. "Consistent estimation of linear panel data models with measurement error," Journal of Econometrics, Elsevier, vol. 200(2), pages 169-180.
    3. Jørgen Aasness & Odd Nygård, 2014. "Revenue functions and Dupuit curves for indirect taxes with cross-border shopping," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(2), pages 272-297, April.
    4. Eva Ventura & Albert Satorra, 1998. "Lyfe-cycle effects on household expenditures: A latent-variable approach," Economics Working Papers 354, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Sverre Grepperud, 1997. "Soil Depletion Choices under Production and Price Uncertainty," Discussion Papers 186, Statistics Norway, Research Department.

    More about this item

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • D1 - Microeconomics - - Household Behavior
    • D3 - Microeconomics - - Distribution

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