Nonlinear income effects in random utility models: revisiting the accuracy of the representative consumer approximation

This article investigates the implications of nonlinear income effects in Random Utility Models (RUM) for measuring general equilibrium welfare impacts. A popular approach in applied welfare analysis is to approximate the expected compensating variation (cv) for an amenity change as the cv of a representative consumer whose indirect utility is given by the expected maximum utility. However, this approach can be misleading in the case of nonmarginal changes as it implies that changes in income do not affect the consumer's choice. In this case the true expected cv can be obtained via simulation. Empirical applications to recreational demand find that the bias from the representative approach is small. This article re-evaluates the accuracy of the representative consumer approximation in the context of measuring the general equilibrium welfare impacts of large environmental changes. Our findings suggest that, though the representative consumer approximation could lead to biased point estimates of the expected cv, this bias is overwhelmed by the size of the confidence intervals that result from the empirical estimation of household preferences.     

Environmental defensive expenditures and households behaviour in Italy

The paper explores the role of Environmental Defensive Expenditures in the consumption behaviour of Italian households. Environmental Defensive Expenditures are not borne to increase households' welfare, but to prevent or avoid the effects of a worsening environmental quality. The literature on environmental accounting argues that economic growth in industrialized countries is accompanied by an increasing load of defensive activities that may lead to a reorientation of consumption behaviour. In this work this hypothesis is tested using annual data on mean consumption expenditures of Italian households from 1985 to 1996. A complete system of demand is estimated and short-run price elasticities of demand for Defensive Expenditures are calculated. The complete system of demand functions is specified using the Quadratic Almost Ideal Demand System proposed by Banks, Blundell and Lewbel. Results show that there is very low substitution between the demand for the six aggregate goods in which total expenditure is here divided and the Environmental Defensive Expenditures. Thus it seems that an increase in Environmental Defensive Expenditures, driven by a change in environmental quality, would not lead to a change in the consumption pattern, at least as far as Italian households are concerned.     

Price adjustment in an atomistic market

This paper considers the price adjustment process in a market which retains the characteristics of a perfectly competitive market except that individual firms are price-setters. Buyers, unaware initially of what prices which firms are charging, indulge in search by contacting a sample of firms and buy (according to a demand curve) from the lowest-price firm encountered. Firms set prices to maximise profits over their perceived (or estimated) demand curve, and update their estimated demand curve in accordance with the observed change in demand between successive time periods. It is shown that the price distribution converges to a degenerate distribution centred on the monopoly price.     

An econometric application of the theory of the farm-household

Employing a Cobb-Douglas specification for the production function and a modified linear expenditure system, the paper presents an econometric model of household production, consumption and labor supply behaviour for a semi-commercial farm with a competitive labor market. The model, estimated from primary, cross-sectional, Malaysian data, is used to analyse the impact of migration, output price intervention and technological change on the agricultural sector. In doing so, the wage-rate is treated as an endogenous variable to be determined by the interaction of aggregate labor demand and supply curves obtained from the estimated micro functions.     

The income elasticity of household energy demand: a quantile regression analysis

This article examines variation in the income elasticity of household energy demand across the energy expenditure distribution using expenditure data from the five most recent Household Budget Surveys (HBSs) in Ireland: the 1987, 1994/1995, 1999/2000, 2004/2005 and 2009/2010 HBS. The analysis uses a two-stage instrumental variable quantile regression approach and is based on each HBS cross section, as well as the overall pooled observations. The estimated elasticities are compared across low- and high-energy-consumption scenarios and to a benchmark elasticity estimated using two-stage least squares. The results provide evidence that there is significant variation in the income elasticities across the energy expenditure distribution and that care must be taken when using the constant mean elasticity for policy purposes. More specifically, any examination of the future impact of a change in income support policy measures on energy consumption should recognize the substantial context-dependent variation in the income elasticity.     

New Technologies And The Demand For Heterogeneous Labor: Firm-Level Evidence For The German Business-Related Service Sector

This paper investigates the impact of modern information and communication technologies on the demand for heterogeneous labor. It starts with an interrelated factor demand system. The ‘desired’ level of employment which is needed in such models, is derived from a Generalized Leontief cost function with quasi-fixed factors. Firm-level, cross-sectional data taken from an innovation survey in the service sector are used in the empirical analysis. The model is estimated by a trivariate ordered probit model. Evidence in favor of skill-biased technological change in the fast-growing German business-related services sector is found. ‘Ibe paper suggests a new method of calculating skill-specific and firm-specific labor cost from information on total labor cost and the share of each skill group in total employment only.     

Effects of financial innovations on the money demand function: a Canadian evidence

A money demand function for the Candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants. Two sets of estimation results have been analysed: the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations. The estimated equations have been used to generate ex-post simulations and forecasts. The results suggest that innovations have displaced the money demand function in the early 1980s. It also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function.     

Stock Market Fluctuations and Money Demand in Italy, 1913–2003

This paper examines the impact of stock market fluctuations on money demand in Italy from a long‐run perspective. The money demand function estimated by Muscatelli and Spinelli (2000) for a long time span is utilized as a benchmark, adding to the specification information on share prices from the Milan Stock Exchange Reform of 1913 to recent years. For a shorter time period (1938–2003), annual observations on stock market capitalization and turnover velocity are also considered. The empirical findings suggest that stock market fluctuations help to explain temporary movements in liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long‐run relationship is unstable. In a dynamic, short‐term specification of money demand, the estimated coefficient of deflated stock prices is positive, and therefore compatible with a wealth effect, in the years 1913–1980, while in the last two decades a substitution effect has prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalization. Moreover, in the recent period, stock market turnover and money growth are positively correlated .     

The fertility effect of dependent tax exemptions: estimates for the United States

Many developed countries allow tax subsidies for families to help reduce the costs of bearing and rearing children. Whittington et al. in 1990 developed a theoretical model in which they estimated the effect of tax deductions for dependent children on fertility in the US. This paper develops an empirical model of estimation and reconsiders Whittington's work. Nonlinear specification of the demand curve for children is central to the new model. This change is made based on the hypothesis that nonlinear specification will better capture the shape of demand. Using annual time-series data over the period 1913-84, the study found the marginal effect of dependent exemptions to decrease with exemption level. Given the historically low recent levels of exemptions in real terms, increasing current exemptions will affect fertility to a greater extent than previously estimated. Graphically, results point to the existence of a concave demand for children.     

Kalman filter approach to estimate the demand for international reserves

A few studies have provided empirical support for the fact that the demand for international reserves experienced structural instability in 1973 and 1979 due to a change in exchange rate system and oil price shocks. Thus, under the current managed float due to exchange rate and oil price fluctuations, coefficient estimates could be time dependent. After showing that indeed, estimated coefficients are time dependent, the Kalman filter estimation method is employed and the reserve demand function for 19 industrial countries estimated. The Kalman filter approach incorporates the time-varying properties of coefficients estimates.     

Alcohol consumption,censorship and misjudgement

In the study of the economic determinants of alcohol consumption, there is an under-appreciated issue of sample selectivity as consumption is often not fully observed. Sample selectivity involves ignoring consumption below a censorship cut-off level. This article estimates a demand system for beer, wine and spirits with and without allowance for selectivity. Then using a simulation approach, it examines the impact of misjudgement in the censorship level on the estimated demand parameters. A mean squared error (MSE) criterion is suggested for determining the appropriate censorship level.     

Estimating British workers' demand for safety

This paper estimates workers' demand function for job safety using the British General Household Survey data. The estimation employs Rosen's two-stage procedure. The main difference between our study and those done in the past is that we estimate hedonic price equations with data sets from two labour markets. Our approach overcomes the usual identification problems associated with the application of Rosen's method. The estimation shows that there is a significant wage compensation for job risk in the UK. The willingness-to-pay for a 1/100 000 decrease of annual job fatal accident rate from our estimated workers' demand function is about £6 in 1973 prices. The estimation of a demand function for safety also enables the derivation of workers' willingness-to-pay for non-marginal change of job risk, and this can be used for cost-benefit analysis on projects involving such non-marginal changes.     

An evaluation of excess demand,actual cost and normal cost pricing hypotheses using non-nested tests

This paper has emperically analyzed three versions(zero lag,geometric lag and almon lag) of three price change hypotheses – namely the excess demand, actual cost and the normal cost hypothesis – the goal being to select the hypothesis that describes the underlying price dynamics for manufactured goods. The rival models are specified as non-nested alternatives and each version is estimated by using an efficient estimator. The traditional discrimination criteria which clearly reject the zero lag version, are found to be impotent in discriminating between the dynamic versions of the models. A sequential cross-evaluation of the two dynamic versions using both pairwise and multiple non-nested hypothesis tests proposed by Davidson and MacKinnon reveals a systematic domination by the almon version of normal cost pricing over both the excess demand and the actual cost pricing mechanisms in the Canadian manufacturing sector during the period 1961:1–87:4. This result is robust under alternative specifications of the desired stock of inventories for the excess demand model. The finding implies that short–run variations in demand conditions or in actual unit costs arising from temperoary changes in productivity may not paly a significant role in manufactured goods pricing decisions.     

The Regional Demand for Petrol in Australia*

The regional demand for petrol in Australia is estimated using quarterly data on a State basis for the period from the September quarter 1958 through the June quarter 1981. A dynamic demand model is postulated and estimates obtained using an iterative Zellner procedure. The results suggest that per capita petrol demand is not income elastic as reported in other studies, and support the hypothesis that demand is price inelastic. In addition, the States exhibit statistically significant differential responses to price and income shocks. This implies that the specification of a single national demand function may be misleading.     

The constant preferences assumption as a specification error in demand analysis

Complete demand systems often are estimated under the assumption that preferences are constant. If preferences do change in reality, this leads to a specification error. This note explores some of the implications of such a specification error.     

How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis

This paper studies the transmission of a change in the global demand for financial services on the domestic growth of an international financial center. To capture most of the possible interactions, we develop a dynamic general equilibrium model that we calibrate on Luxembourg data. Results show that the financial multiplier (ratio of a change in output to a change in the financial sector value added) is above 2 in the medium run and largely above 1 in the long run. The main transmission channels are net exports (expenditure approach) or capital income (income approach) in the medium run and investment in the long run. Moreover, the global demand for financial services has substantial implications for public finances. These findings also mean that a sudden loss of confidence towards a specific international financial center might have dramatic consequences for its whole economy.     

Buffer stocks,exchange rates and deviations from purchasing power parity

In this paper an extension of the Monetary Approach to the Exchange Rate reduced form is presented and estimated for four bilateral exchange rates with data from the recent floating experience. The extension incorporates two features: a more sophisticated modelling of money demand, using theCarr andDarby money demand specification, and allowing for deviations from purchasing power parity. The estimated results are supportive of our extended specification and we conclude by arguing that care should be taken in specifying the underlying structural relationships in asset reduced form exchange rate equations.     

The demand for residential electricity: new evidence on time-varying elasticities

This study employs a generalized functional form to examine demand for residential electiricity. The appropriatenes of the conventional double-log and linear forms are tested. Time-varying elasicities are estimated. Major findings are summarized as follows:(1) the double-log and linear forms can be rejected at the 0.05 and 0.01 levels, respectively; (2) long-run own-price elasticities declined in absolute value consistently from 2.13 to 1.19 during the period 1950–87; (3) long-run income elasticities also decreased from 1.29 to 0.97 during the same period; and (4) long-run corss-Price elasticities with respect to the price of natural gas dropped form 0.40 to 0.29. These results may be heplful to decision makers in determining the change in total revenues owning to the change in prices, pricing strategies, the effectiveness of energy conservation programmes, the effect of rising real income on the demand for residential electricity and future demand.     

Instability in cointegration regressions: a brief review with an application to money demand in Portugal

This study addresses some modelling questions related to the possibility of structural change in models with nonstationary variables. Focusing on cointegration issues, some methodological aspects are discussed, attempting to integrate coherently the several steps of the modelling strategy. These range from unit root to cointegration testing and to testing for instability in the cointegration vector. An empirical example with Portuguese data tries to illustrate the usefulness of this approach, where a simple money demand function is estimated using an error-correction model (ECM). If a break is explicitly allowed in the cointegration vector the forecasting performance of the ECM improves.     

Real Estate Market Policy and Household Demand for Housing

This paper used an estimated mixed multinomial logit model of household housing demand to examine the impact of four housing market‐related policies on a stated preference survey sample. The estimated demand probability function suggested that household choice behaviour does show huge heterogeneity. The estimated results were then employed to examine the effects of the policies. We estimated the potential disequilibrium between demand and supply under the construction‐size‐limitation policy, demonstrated that the efficient movers' subsidy increases along with the household income, and simulated the changes in housing demand when tax policy is changed. We demonstrate the potential usefulness of our modelling framework in assisting policy‐making decisions. Our model also partially explains the failures and controversies of the latest real‐estate intervention policies in China.