On the estimation of 'an implicitly additive demand system'

Abstract

Motivated by a lack of Engel flexibility in commonly used demand systems, Rimmer and Powell developed a new demand system. This system, referred to AIDADS, is implicitly, directly additive, possesses marginal budget shares and thus Engel elasticities, that vary nonlinearly with expenditure such that predicted budget shares are restricted to the [0,1] interval. Due to these attractive Engel properties, AIDADS represents a significant contribution to the literature on demand analysis. This paper presents an alternative estimation procedure to the one used by Rimmer and Powell and examines its properties via a case study. The proposed approach avoids a linear approximation employed in Rimmer and Powell's estimation framework. Based on a small Monte Carlo study, it appears that the approach produces more accurate estimates of the parameters and Engel elasticities.