Long-run Study of Residential Water Consumption

The estimation of dynamic models and themeasure of long-run effects arerare in residential water demand studies. Weshow in this paper that a dynamicmodel of water consumption can be derived froma structural optimisation programsolved by local communities. Thisnonlinear model is estimated on asample of French municipalities and is foundasymptotically equivalent to a dynamic panel data model that is linear in theparameters. The latter includes anoriginal error-component structure that allowsfor a flexible heterogeneity pattern, including both the usual idiosyncraticeffect, and an additional individualeffect affected by a multiplicative time-varyingparameter. As usual GMM estimators for panel data are not consistent inthis case, we propose a new GMMprocedure that yields consistent and efficientestimates of short- and long-runprice elasticities (respectively −0.26 and−0.40).