Advertisement

Empirical Economics

, Volume 56, Issue 1, pp 137–172 | Cite as

When does specification or aggregation across consumers matter for economic impact analysis models? An investigation into demand systems

  • Ole BoysenEmail author
Article

Abstract

Economic impact analysis simulation models frequently rely on some kind of representation of consumption behavior. However, the sensitivity of such results with respect to the choices of the specification and the level of aggregation across consumers has not yet been thoroughly examined. We exploit a unique dataset to simulate various stereotypical scenarios and investigate the influence of the choice between six demand system specifications and household-level versus national-level models on several outcome measures. We find that both choices have a large influence on simulation results and thus on policies deduced therefrom. Our results point to pragmatic recommendations for various settings.

Keywords

Demand systems Aggregation Specification Calibration Economic impact analysis models 

JEL Classification

C69 D12 

Notes

Acknowledgements

I would like to thank three anonymous referees for their constructive comments which greatly helped to improve this article. I am indebted to Sherman Robinson for many insightful discussions.

References

  1. Anderson K, Martin W, van der Mensbrugghe D (2006) Would multilateral trade reform benefit Sub-Saharan Africans? J Afr Econ 15(4):626–670Google Scholar
  2. Banks J, Blundell R, Lewbel A (1996) Tax reform and welfare measurement: Do we need demand system estimation? Econ J 106(438):1227–41Google Scholar
  3. Banks J, Blundell R, Lewbel A (1997) Quadratic Engel curves and consumer demand. Rev Econ Stat 79(4):527–539Google Scholar
  4. Barnett WA, Serletis A (2008) Consumer preferences and demand systems. J Econom 147(2):210–224Google Scholar
  5. Blundell R, Stoker TM (2007) Models of aggregate economic relationships that account for heterogeneity. In: Heckman J, Leamer E (eds) Handbook of econometrics, vol 6. Elsevier, Amsterdam, pp 4609–4666Google Scholar
  6. Bourguignon F, da Silva LAP, Bussolo M (eds) (2008) The impact of macroeconomic policies on poverty and income distribution: macro-micro evaluation techniques and tools. The World Bank and Palgrave MacMillan, WashingtonGoogle Scholar
  7. Boysen O (2016) Food demand characteristics in Uganda: estimation and policy relevance. S Afr J Econ 84(2):260–293Google Scholar
  8. Boysen O, Miller AC, Matthews A (2016) Economic and household impacts of projected policy changes for the Irish agri-food sector. J Agr Econ 67(1):105–129Google Scholar
  9. Caves DW, Christensen LR (1980) Global properties of flexible functional forms. Am Econ Rev 70(3):422–32Google Scholar
  10. Cooper RJ, McLaren KR (1996) A system of demand equations satisfying effectively global regularity conditions. Rev Econ Stat 78(2):359–64Google Scholar
  11. Cooper RJ, McLaren KR, Rehman F, Szewczyk WA (2015) Economic welfare evaluation in an era of rapid technological change. Econ Lett 131:38–40Google Scholar
  12. Cranfield JAL, Eales JS, Hertel TW, Preckel PV (2003) Model selection when estimating and predicting consumer demands using international, cross section data. Empir Econ 28(2):353–364Google Scholar
  13. Dawkins C, Srinivasan T, Whalley J (2001) Calibration. In: Heckman JJ, Leamer E (eds) Handbook of econometrics, vol 5. Elsevier, Amsterdam, pp 3653–3703Google Scholar
  14. de Boer P (2010) Modeling household behavior in a CGE model: linear expenditure system or indirect addilog? In: DEGIT Conference Paper c015XXSlahUndXX059, dynamics, economic growth, and international trade, DEGIT - XV Conference, 3 to 4 September 2010. Frankfurt, GermanyGoogle Scholar
  15. de Boer P, Paap R (2009) Testing non-nested demand relations: linear expenditure system versus indirect addilog. Statistica Neerlandica 63(3):368–384Google Scholar
  16. de Janvry A, Sadoulet E (2010) The global food crisis and Guatemala: What crisis and for whom? World Dev 38(9):1328–1339Google Scholar
  17. Deaton A, Muellbauer J (1980a) Economics and consumer behavior. Cambridge University Press, CambridgeGoogle Scholar
  18. Deaton AS, Muellbauer J (1980b) An almost ideal demand system. Am Econ Rev 70(3):312–26Google Scholar
  19. Decoster A, Schokkaert E (1990) Tax reform results with different demand systems. J Public Econ 41(3):277–296Google Scholar
  20. Fisher D, Fleissig AR, Serletis A (2001) An empirical comparison of flexible demand system functional forms. J Appl Econom 16(1):59–80Google Scholar
  21. Foster J, Greer J, Thorbecke E (1984) A class of decomposable poverty measures. Econometrica 52(3):761–66Google Scholar
  22. Gohin A (2005) The specification of price and income elasticities in computable general equilibrium models: an application of latent separability. Econ Model 22(5):905–925Google Scholar
  23. Golan A, Judge G, Miller D (1996) Maximum entropy econometrics. Wiley, New YorkGoogle Scholar
  24. Gorman WM (1981) Some Engel curves. In: Deaton A (ed) Essays in the theory and measurement of consumer behaviour in honor of Sir Richard Stone. Cambridge University Press, Cambridge, pp 7–29Google Scholar
  25. Hanoch G (1975) Production and demand models with direct or indirect implicit additivity. Econometrica 43(3):395–419Google Scholar
  26. Hertel TW (ed) (1997) Global trade analysis: modeling and applications. Cambridge University Press, CambridgeGoogle Scholar
  27. Hertel T (2013) Global applied general equilibrium analysis using the global trade analysis project framework. In: Dixon PB, Jorgenson DW (eds) Handbook of computable general equilibrium modeling, vol 1. Elsevier, Amsterdam, pp 815–876Google Scholar
  28. Hertel T, van der Mensbrugghe D (2016) Behavioral parameters. In: B. Narayanan, A. Aguiar and R. McDougall (eds), GTAP 9 Data Base Documentation, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, West LafayetteGoogle Scholar
  29. Houthakker HS (1960) Additive preferences. Econometrica 28(2):244–257Google Scholar
  30. Jensen B, de Boer P, van Daal J, Jensen P (2011) Global restrictions on the parameters of the CDES indirect utility function. J Econ 102(3):217–235Google Scholar
  31. King MA (1983) Welfare analysis of tax reforms using household data. J Public Econ 21(2):183–214Google Scholar
  32. Klevmarken N (1979) A comparative study of complete systems of demand functions. J Econom 10(2):165–191Google Scholar
  33. Lewbel A (1991) The rank of demand systems: theory and nonparametric estimation. Econometrica 59(3):711–730Google Scholar
  34. Madden D (1996) Marginal tax reform and the specification of consumer demand systems. Oxf Econ Pap 48(4):556–567Google Scholar
  35. Mas-Colell A, Whinston M, Green J (1995) Microeconomic Theory. Oxford University Press, New YorkGoogle Scholar
  36. McLaren KR, Yang O (2016) A class of demand systems satisfying global regularity and having complete rank flexibility. Empir Econ 51(1):315–337Google Scholar
  37. Parks RW (1969) Systems of demand equations: an empirical comparison of alternative functional forms. Econometrica 37(4):629–650Google Scholar
  38. Perroni C, Rutherford TF (1998) A comparison of the performance of flexible functional forms for use in applied general equilibrium modelling. Comput Econ 11(3):245–63Google Scholar
  39. Pollak RA (1971) Additive utility functions and linear Engel curves. Rev Econ Stud 38(4):401–414Google Scholar
  40. Pollak RA, Wales TJ (1995) Demand system specification and estimation. Oxford University Press, New YorkGoogle Scholar
  41. Ray R (1986) Sensitivity of ‘optimal’ commodity tax rates to alternative demand functional forms. J Public Econ 31(2):253–268Google Scholar
  42. Ray R (1999) Marginal and non-marginal commodity tax reforms with rank two and rank three demographic demand systems. Oxf Econ Pap 51(4):689–712Google Scholar
  43. Ryan DL, Wales TJ (1998) A simple method for imposing local curvature in some flexible consumer-demand systems. J Bus Econ Stat 16(3):331–38Google Scholar
  44. Simler KR (2010) The short-term impact of higher food prices on poverty in Uganda, Policy Research Working Paper 5210, The World Bank, WashingtonGoogle Scholar
  45. Stone R (1954) Linear expenditure systems and demand analysis: an application to the pattern of British demand. Econ J 64(255):511–527Google Scholar
  46. Sydsæter K, Hammond P, Strøm A (2012) Essential mathematics for economic analysis, 4th edn. Pearson Education Limited, HarlowGoogle Scholar
  47. UBOS (2014) Uganda National Household Survey 2012/2013. Uganda Bureau of Statistics, Kampala, UgandaGoogle Scholar
  48. Wodon Q, Zaman H (2010) Higher food prices in Sub-Saharan Africa: poverty impact and policy responses. World Bank Res Obs 25(1):157–176Google Scholar
  49. Wolff H, Heckelei T, Mittelhammer R (2010) Imposing curvature and monotonicity on flexible functional forms: an efficient regional approach. Comput Econ 36(4):309–339Google Scholar
  50. Yu W, Hertel TW, Preckel PV, Eales JS (2004) Projecting world food demand using alternative demand systems. Econ Model 21(1):99–129Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.School of Agriculture and Food ScienceUniversity College DublinDublinIreland

Personalised recommendations