Non‐Homothetic Multisector Growth Models

Multisector growth (MSG) models are dynamic versions of computable general equilibrium (CGE) models. Non‐homothetic preference (utility) functions are required for the evolution of factor allocations and industrial structures in accordance with consumption expenditure patterns implied by the non‐unitary income elasticities observed in all budget data since Engel in the 1850s. But comparative static general equilibrium solutions and particularly solving the dynamics of MSG models require explicit specifications of all demand and cost (price) functions. On the demand side, the constant differences of elasticity of substitution (CDES) non‐homothetic indirect utility functions and Roy's identity provide the explicit Marshallian demand functions and budget shares. Sectorial constant elasticity of substitution (CES) cost functions and Shephard's lemma provide the explicit relative commodity price functions and the sectorial cost shares and capital–labor ratios. Walrasian equilibria are given by one equation and the multisector dynamics by three differential equations. Benchmark solutions are given for three cost regimes of a 10‐sector MSG model. History patterns of industrial/allocational evolutions are recognized.     

Estimating consumer demand in Korea

In this paper, time series annual data on five consumer goods for Korea are analyzed using the neoclassical model of consumer behavior. The approach taken is the indirect utility function and employs a translog form. Various restrictive specifications of consumer preferences with respect to homotheticity and separability are examined and rejected by the likelihood ratio test. Income and price elasticities are estimated, which appear to be generally high relative to those of developed countries. Growth in real income is primarily responsible for changes in commodity demand. Marginal utilities of income and associated income elasticities are calculated, which are consistent with normal expectations.     

V-Branch: A generalized utility function

Much of the work in demand theory is restricted by the functional form of the relationship The S-Branch utility function, which is a generalization of the linear expenditure system, corrects many of the restrictions. Many faults, however, still exist. The Allen partial elasticities of substitution are equal and constant for all commodities from different subsets of the function. The V-Branch utility function corrects many of these faults. The Allen partial elasticities of substitution are not restricted to be constant or equal either within or between commodity subsets. They vary according to the amount consumed of each commodity.     

Functional separability within a quadratic inverse demand system

In this paper, a quadratic inverse (almost ideal) demand system (IQUAIDS) is derived, that generalizes the inverse (almost ideal) demand system (IAIDS). Starting from a flexible parameterization of the distance function, this model allows a more flexible specification by overcoming the potential restrictiveness of linear scale curves. However, at a point of normalization, the IQUAIDS boils down to the IAIDS, thus the additional flexibility pertains only to the specification of scale elasticities away from the point of approximation. Previous work on functional separability is extended to the case of inverse demands, and necessary and sufficient conditions for weak separability of the direct and indirect utility function derived, in terms of the Antonelli elasticities of complementarity and of the scale elasticities. Their proper parametric representation within the inverse specification is also derived. An empirical application to fish demand in Italy is provided, mainly for illustrative purposes.     

International outsourcing and the demand for skills

This paper explores the impact of international outsourcing on the demand for skills in three small and open EU economies. A model of variable costs and factor demand functions for different skill levels and imported as well as domestic materials are constructed. International outsourcing is treated directly as a substitution process between labour of different skills and imported inputs. The direct consequence of international outsourcing for labour is measured by the cross price elasticities. These cross price elasticities indicate a negative outsourcing impact on low- and medium-skilled labour in the three countries and on high-skilled labour in two out of the three countries. This outsourcing effect on labour is compared with the direct effect of embodied technical change and of the technical change bias. International outsourcing has a more unambigous and significant negative impact on labour than technical change. Technical change is either labour using (embodied technical change) or only slightly biased in favour of high-skilled labour. When the cost savings effect of international outsourcing is taken into account, an indirect positive stimulus for all skill categories arises from a greater demand for goods. It can be shown, that this indirect positive effect can compensate for a large part of the negative substitution impact of international outsourcing on labour.     

Empirical demand systems incorporating intertemporal consumption dynamics

This article presents and estimates demand systems by explicitly incorporating intertemporal consumption behavior as summarized by the Euler equation. Demand systems are characterized by two indirect utility functions which are effectively globally regular and can better approximate nonlinear Engel curves. Furthermore, an exact and nonlinear Euler equation is derived without a log approximation. This equation is estimated jointly with the demand functions by a careful implementation of the orthogonality conditions using generalized method of moments. We illustrate the techniques by estimating the demand system and Euler equation for Australian aggregate data. Results generally indicate that the proposed methods are promising. The estimated rate of time preference is fairly small while the restrictions producing the moment equations are not rejected. Estimated Frisch price elasticities, which are relevant in an intertemporal setting, appear reasonable, and the intertemporal elasticity of substitution for consumption is found to be small, which are consistent with the findings in earlier studies.     

How product innovation in the North may immiserize the South : A new look at the Ricardian model with a continuum of goods

The paper proposes a theoretical model investigating the welfare consequences of technological shocks in a Ricardian framework (a la Dornbush, Fisher and Samuelson, 1977). Contrary to the existing literature, the model incorporates a nonhomothetic demand function whose price and income elasticities are endogenously determined by technology. Nonhomothetic preferences are modeled as the result of the hierarchical consumption of luxury and necessity goods. The nature of technical progress determines the consumption pattern and notably the magnitude of the substitution effect between necessities and luxuries. The model is applied to the case of trade between two economies with different development levels. It is shown in particular that the developing country can suffer a fall in utility as a result of technical progress in the developed country biased towards luxury goods. This configuration depends on the size of the development gap and reflects the fact that Southern goods are less attractive, the higher the range of goods consumed. This result suggests that there is an optimal level of development gap to avoid LDCs being harmed by technical progress in the North.     

Factors substitutability,heterogeneity and endogenous fluctuations in a finance constrained economy

Summary.   This paper examines the local properties of perfect foresight equilibrium of a finance constrained economy featuring two classes of infinitely-lived agents with heterogeneous general preferences. It is primarily concerned with the conceivability of endogenous fluctuations for large plausible capital-labor elasticities of substitution. It is notably shown that heterogeneity in preferences allows Hopf cycles to be entirely consistent with a wide range of elasticities of substitution including the unitary one (Cobb-Douglas specifications). Received: April 23, 1999; revised version: January 24, 2000     

The structure of consumer preferences,Federal Republic of Germany, 1950–1973

Summary The objective of this paper is to analyze the structure of consumer preferences and changes in preferences over time. Consumer preferences are represented by an indirect translog utility function with time-varying preferences that is quadratic in the logarithms of its arguments. We consider a system of demand functions associated with parameter restrictions consistent with the theory. We characterize groupwise separability and groupwise homotheticity of preferences and derive for each set of restrictions on preferences parametric restrictions on the corresponding system of demand functions. Empirical results of the tests, based on time series data for FRG consumption expenditures on three commodity groups — durables, non-durables, and energy — are presented.     

Discrete choice model analysis of mobile telephone service demand in Japan

This paper analyzes the demand for mobile telephones including second generation (2G) and third generation (3G) by using a discrete choice model called a mixed logit model. First, we examine the substitution patterns of the demand for mobile telephones and show that demand substitutability among alternatives is stronger within the provider nest category than within the standard nest category in mobile telephone services. The closest substitute for NTT’s 3G service is NTT’s 2G service, rather than KDDI’s 3G service, for example. Second, we investigate the elasticities of demand for various functions including e-mail, Web browsing, and moving picture delivery. Consequently, we cannot observe marked differences between 2G and 3G services based on these calculated elasticities, indicating that it takes time for 3G subscribers to gain proficiency with such new services.      

On the determinants of complementarity: Elasticities of substitution, income shares, and relative prices

This paper extends an example due to Samuelson (1974) to develop the relationship between possible compensated complementarity between two goods and the two elasticities of substitution in an extended three good CES utility function. It also uses the same utility function to develop the implications of a generalized income share parameter and two different relative prices for possible complementarity between goods. Finally, it explores possible complementarity in a more general utility function with non-constant elasticities of substitution.     

Demand for Environmental Quality: An Empirical Analysis of Consumer Behavior in Sweden

In this paper we estimate the income elasticity of demand for recreational services and other traditional groups of goods in Sweden and test for potential changes in such estimates over the twentieth century. Due to the difficulty of directly observing the demand for recreational services, we employ an indirect methodology by using the demand for some outdoor goods as a proxy for the demand for recreational services. In line with most prior research, our results confirm the expectation that recreational services, as a public good, is a luxury good in Sweden. Our results also show that the income elasticities for traditional goods are stable over time, indicating that consumer preferences for expenditure on these specific commodities do not change over time.      

Long-run estimates of interfuel and interfactor elasticities

Meta-analyses of interfuel and capital-energy elasticities of substitution show that elasticity estimates are dependent on the type of data − time series, panel, or cross-section − and the estimators used. Econometric theory suggests that the between estimator might generate the best estimates of long-run elasticities but no existing estimates of elasticities of substitution have used it. Alternatively, Chirinko et al. argued in favor of estimating long-run elasticities of substitution using a long-run difference estimator. We provide estimates of China’s interfuel and interfactor elasticities of substitution using the between and long-run difference estimators. To address potential omitted variables bias, we add province level inefficiency and national technological change terms to our regression model. The results show that demand for coal and electricity in China is very inelastic, while demand for diesel and gasoline is elastic. With the exception of gasoline and diesel, there are limited substitution possibilities among the fuels. Substitution possibilities are greater between energy and labor than between energy and capital. The results are quite different to some previous studies for China but coincide well with the patterns found in meta-analyses for long-run estimates of elasticities of substitution.     

The role of labour demand elasticities in tax incidence analysis with heterogeneous labour

Whether labour bears full burden of household level income and consumption taxes ultimately depends on the degree of substitutability among different types of labour in production. We find more variation in incidence patterns across households with less than perfectly substitutable heterogeneous labour than with perfectly substitutable homogeneous labour in production. This finding is based on results obtained from homogeneous and heterogeneous labour general equilibrium tax models calibrated to decile level income and consumption distribution data of UK households for the year 1994. We use labour supply elasticities implied by the substitution elasticity in households' utility functions and derive labour demand elasticities from the substitution elasticity in the production function. First version received: March 1998/Final version received: April 1999     

A class of demand systems satisfying global regularity and having complete rank flexibility

A class of demand systems based on simple parametric specification of the indirect utility functions, but allowing for the parsimonious imposition of global regularity, is proposed. Demand systems in this class are completely flexible in rank, that is, can be potentially specified to acquire as large a rank as required in empirical work. They also exhibit a clear and reasonable homothetic asymptotic behaviour, as income approaches infinity. In an empirical application using Australian data, several examples from this class are estimated and compared with some popular alternatives in the literature.     

Gender differences in the volatility of work hours and labor demand

This paper examines the role of heterogeneity in a real business cycle model, which traditionally has not fully captured the relative volatility of hours to output. Men and women have different cyclical volatilities in hours worked, which is robust to different filtering methods. This empirical regularity is used to motivate a standard RBC model augmented to allow for two different agents following Jaimovich et al. (2013). These two agents have identical utility functions, but face different elasticities of labor demand due to their different complementarities with capital. These estimated elasticities find that women are more complementary to capital. The calibrated model generates the cyclical volatility of work hours by gender and for the total hours worked that matches the U.S. data better than the traditional representative agent model. I then explore other extensions to this model including investigating the stability of the estimated labor demand elasticities and allowing for various Frisch elasticities of labor supply. This paper demonstrates that allowing for even broad levels of heterogeneity in a simple framework can increase the model’s tractability with the data. Since gender is important to explain U.S. business cycle dynamics, we need to carefully consider heterogeneity when analyzing counter-cyclical economic policy, as it may not have symmetric effects across assorted groups.     

Fiscal policy simulations – a comparison of UK models

The problem of endowing large applied general equilibrium models with numerical values for parameters is formidable. For example, a complete set of own- and cross-price elasticities of demands for the MONASH model of the Australianeconomy involves in excess of 50000 items. Invoking the minimal assumptions that demand is generated by utility maximization reduces the load to about 26000 - obviously still a number much too large for unrestrained econometric estimation. To obtain demand systems estimates for a dozen or so generic commodities at a top level of aggregation (categories like ‘food’, ‘clothing and footwear’, etc.), typically Johansen's lead has been followed, and directly additive preferences imposed upon the underlying utility function. With the move beyond one-step linearized solutions of applied general equilibrium models, the functional form of the demand system adopted becomes an issue. The most celebrated of the additive-preference demand systems, the linear expenditure system (LES), has one drawback for empirical work; namely, the constancy of marginal budget shares (MBSs) - a liability shared with the Rotterdam system. To get around this, Theil and Clements used Holbrook Working's Engel specification in conjunction with additive preferences; unfortunately both Working's formulation and Deaton and Muellbauer's AIDS have the problem that, under large changes in real incomes, budget shares can stray outside the [0, 1] interval. It was such behaviour that led Cooper and McLaren to devise systems with better regularity properties. These systems, however, are not globally compatible with any additive preference system. In this paper we specify, and estimate, at the six-commodity level, an implicitly directly additive-preference demand system which allows MBSs to vary as a function of total real expenditure and which is globally regular throughout that part of the the price-expenditure space in which the consumer is at least affluent enough to meet subsistence requirements.     

Effects of Changes in Household Size,Consumer Taste & Preferences on Demand Pattern in India

Current research in applied demand analysis has been addressing the twin issues of degree of non-linearity or curvature of the Engel curves and the ability to capture price effects appropriately by the demand system. Further, in addition to income and prices, the role of demographic variables like household size, composition and dynamic aspects like consumer taste & preferences are also being ’ emphasized in recent literature. Continuous efforts are being made to modify the existing models and propose new ones to incorporate the above developments. The purpose of this study is to re-examine the usefulness of the popular linear expenditure system vis-à-vis the two other flexible models viz. Nasse expenditure system, a generalization of the linear expenditure system itself, and the almost ideal demand system in the above context for India.The empirical results indicate wide variation in marginal budget shares and demand elasticities across income groups, rural-urban sectors and alternative models. The household size and consumer taste & preferences are found to be statistically significant. The results confirm the earlier findings that there are significant changes in consumer tastes away from cereals and pulses in favor of other food and nonfood commodities. The results also show that flexible models, which are theoretically superior, gave unacceptable positive price responses for some commodities and violated second order conditions of utility maximization. It is found that some ad-hoc separability restrictions are needed, thereby limiting the flexibility of the model, to get negative own-price responses in these models. But, second order conditions are still violated. The tests of nested hypotheses also confirm the need for inclusion of household size, consumer taste, income group and rural-urban dummies along with their interaction variables in the demand system.

     

Economic determinants of global mobile telephony growth

This study examines the substitution effect between fixed-line and mobile telephony while controlling for the consumption externality associated with telephone networks. A dynamic demand model is estimated using a global telecommunications panel dataset comprised of 56 countries from 1995–2000. Estimation results show the presence of a substantial substitution effect. Additionally income and own-price elasticities are reported. Analysis of impulse responses for price, income and network size indicate substantial mobile telephone growth is yet to be realised. However, price ceilings imposed in the fixed-line network can retard the growth of the mobile network.     

An empirical study of outbound tourism demand in the UK

A general to specific methodology is used to construct UK demand for outbound tourism models to twelve destinations. A tourism destination preference index is introduced to take into account social, cultural and psychological influences on tourists' decisions concerning their overseas holiday destinations. The tests support the existence of a cointegration relationship for each of 11 UK overseas holiday destinations. The corresponding error correction models are estimated. The empirical results show that the long-run income elasticities for all destinations range from 1.70 to 3.90 with an average of 2.367. The lowest and highest short-run income elasticities are 1.05 and 3.78 respectively, with an average of 2.216. The estimates of the income elasticities imply that overseas holidays are highly income elastic while the own-price elasticities suggest that the demand for UK outbound tourism is relatively own-price inelastic. In terms of the significance of substitution prices in the regression equations, Ireland is the favourite substitute destination for UK outbound tourists. Ex post forecasts over a period of six years are generated from the ECM models and the results compared with those of a naive model, an AR(1) model, an ARMA(p,q) model, and a VAR model. The forecasting performance criteria show that the ECM model has the best overall forecasting performance for UK outbound tourism.