Budget preferences and direct utility

This paper extends a result of Sakai, who presented conditions for indirect preferences from which a utility function can be deduced if demand is single valued. It will be shown that—adding a “partial Lipschitz condition”—Sakai's theorem can be extended to multi-valued demand. Our result follows from the extension of a theorem of Hurwicz and Richter, who have shown that, under certain hypotheses on demand correspondences, an upper semicontinuous utility function f exists, so that the set of utility maximal elements μ_f(B) is contained in the choice set h(B) for every budget B. By our partial Lipschitz condition h(B) ?- μ_f(B) also follows.     

An econometric model of tenure choice and demand for housing as a joint decision

This paper models a household's choice of tenure and demand for housing services as a joint decision imposing the restriction that both discrete and continuous decisions are derived from a single preference ordering. The utility index for households is the translog form of the reciprocal indirect utility function allowing for random preferences. Each household chooses between the two main tenures, the owner-occupied and subsidised rental sectors, but households may be rationed in either or both of these sectors and refused admission, in which case they are assumed to enter the third sector, uncontrolled rental. The model is estimated on UK data for 5895 households.     

Observable preferences for public goods

This paper discusses the circumstances under which it is possible to use the market or aggregate demand functions generated from individual utility maximization to obtain consumers' preferences for certain classes of public goods, and thus obtain the information needed to satisfy the Samuelsonian efficiency conditions for these public goods. The restrictions on the preferences of all consumers which are sufficient to use the aggregate demand function are: (i) there exists a price vector such that the level of public good provisiion is valueless, and (ii) the marginal rate of substitution of the private good price for the level of public good provision is independent of income.     

A note on additive utility and bargaining

Necessary and sufficient conditions are given under which a decision maker's von Neumann-Morgenstern utility function on the Cartesian product of two prospect spaces can be expressed as a sum of coordinate utility functions, assuming that all preferences are given. A main motivation for this result is an application in axiomatic bargaining theory.     

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.     

Aggregation and the existence of a social utility function

In a well-known paper Gorman (Econometrica21 (1953)) established that the necessary and sufficient condition for the existence of an aggregate, or social, utility function, independent of the distribution of income, is that all individuals' income consumption paths be parallel straight lines. Recently Chipman (J. Econ. Theory8 (1974)), building on the paper of Hurwicz and Uzawa (in “Preference Utility and Demand”) has shown that if the distribution of income is proportional and individual preferences are homothetic, aggregate consumption behavior obeys the necessary integrability conditions. It is shown here that the consistency of aggregate behavior can be derived from more general conditions than the ones used by Chipman and Gorman. Examples of demand systems from which aggregate behavior implies a social utility function are provided. It is then shown that if individual demand functions are linear in income—a form employed by both Gorman and Chipman—it is not necessary that the distribution of income be fixed.     

Adaptive behavior and the existence of Weizsäcker's long-run indifference curves

Suppose that past consumptions of the first r commodities (r < n) influence present consumption. Then, the long-run demand function to which demand converges maximizes the equilibrium short-run utility function only under very restrictive conditions. The long-run demand functions can be rationalized by a utility function, different from the equilibrium short-run utility function, if and only if the short-run utility function is such that past consumptions of any good that experience, learning, or taste changes is separable from all other goods. The class of such utility functions has been found.     

Risk and decentralization in the theory of economic policy

In this note, uncertainty is incorporated into Tinbergen's model of economic policy. If the Central Planning Authority's preferences amomg subjective probability distributions can be described by a von Neumann-Morgenstern utility function, and if certain restrictions are imposed on these probability distributions, then the Authority can delegate control over partitions of the instrument vector to its Agencies and so decentralize its decision process.     

A theorem on the identifiability of the von Neumann-Morgenstern utility function from asset demands

If the demand for risky assets is determined by the maximization of an analytical von Neumann-Morgenstern utility function, and if these demands are known as a function of the assets' prices, then this utility function can be constructed without ambiguity.     

Global restrictions on the parameters of the CDES indirect utility function

This paper extends the analytical and empirical application of the basic indirect utility function of Houthakker–Hanoch—called the CDES specification (constant differences of elasticities of substitution). The non-homothetic CDES preferences are the natural parametric extension on the global domain of the homothetic CES preferences with many commodities, and CDES can conveniently be used in specifying CGE multisector models with a demand side satisfying observable Engel curve patterns. Moreover, all Marshallian own-price elasticities are no longer restricted to exceed one, and positive and negative cross-price effects are allowed for in empirical demand analyses. Explicit calculations of the Allen elasticities of substitution are instrumental in demonstrating the economic implications of the parameters of indirect utility functions with global regularity properties and flexibility of the derived demand systems.     

The Effects of Macroeconomic Policy with a Disparity in Price Elasticity Between Private‐ and Public‐ Sector Demands

We introduce a disparity in price elasticity between government demand and consumption demand into a simple money‐in‐the‐utility‐function model. This extension demonstrates that the effect of fiscal policies on production may be positive, negative, or neutral depending on the disparity in price elasticity between sectors. Because the effect of an increase in nominal money supply with constant nominal government expenditure is the opposite to that of a fiscal policy, a fiscal policy financed by seigniorage can have positive, negative, or no effects depending on parameter values. Moreover, the effect of simultaneous implementation of expansionary–contractionary policies depends on how they are combined.     

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.     

On the recoverability of intertemporal preferences

In the absence of futures markets, a consumer's complete set of intertemporal demand functions may not be revealed. Under mild regularity conditions, the multiperiod utility function that generates the observable demand functions is shown to be unique in the class of additively separable and stationary functions.     

The social cost of living index

Household cost of living indexes reflect household preferences; analogous indexes for groups of households require a corresponding concept of group preferences. In this paper I investigate the ‘social cost of living index’, a group index based on the Bergson-Samuelson social welfare function. I first define the index and examine its properties under the assumption that the investigator constructing it expresses his distributional judgments in an explicit Bergson- Samuelson social welfare function; I then examine the ‘maximizing society’ and the ‘independent society’, two cases in which the index can be constructed from the information contained in the market demand functions. In these two cases a Laspeyres index (i.e. the fixed weight index based on the reference consumption pattern) is an upper bound on the exact social cost of living index. In general, however, the assumptions required to place bounds on the social cost of living index are much more likely to be satisfied than those required to place analogous bounds on a household's cost of living index.     

A note on the recoverability and uniqueness of changing tastes

This paper demonstrates that it will be impossible, by observing an agent's demand behavior, to either refute or confirm the general taste change hypothesis without substantially restricting the class of eligible preferences.     

Market demand is a continuous function of prices

A natural class of probabilities on the space of consumers' preferences is presented for which market (i.e., mean) demand is a (continuous) function of prices although individual preferences may be non-convex.     

Should refusal to sell be illegal?

We analyse a private firm's decision of whether to refuse to sell to a particular group of consumers whose interaction with other consumers generates negative externalities. The literature has rarely incorporated this motive directly into the firm's profit-maximisation problem. Discriminatory refusal-to-sell policies can increase profits and consumer utility among those affected by the negative externality. Of course it also reduces utility among consumers who are refused, raising the possibility of an indeterminate effect on social welfare. We obtain a stark and rather surprising result: The refusal-to-sell policy is socially optimal whenever it is individually optimal for a profit-maximising firm to adopt such a policy. No legislation or regulation is required from a social-welfare perspective (under the assumptions used in the specification of the social welfare function). We prove this result analytically for the case of linear demand functions. Numerical simulations show that the result also holds for constant-price-elasticity demand functions.     

Adaptive behavior,demand and preferences

This paper extends the work on endogenous change of tastes of Von Weizsäcker to the n-commodity framework and for a general adaptive behavior process. The paper examines the relation between the effect of taste changes to income and price changes. It provides sufficient conditions for stability of the underlying dynamic process, establishes uniqueness of the equilibrium demand vector and some useful relations between the long-run demand functions and the equilibrium short-run demand functions. It is also shown that the long-run demand functions can be rationalized by a utility function if and only if the short-run utility function is such that any good that experiences learning or taste change is separable from all other goods.     

The micro economics of group behavior: General characterization

We study the demand function of a group of S members facing a global budget constraint. Any vector belonging to the budget set can be consumed within the group, with no restriction on the form of individual preferences, the nature of individual consumptions or the form of the decision process beyond efficiency. Moreover, only the group aggregate behavior, summarized by its demand function, is observable. We provide necessary and (locally) sufficient restrictions that fully characterize the group's demand function, with and without distribution factors. We show that the private or public nature of consumption within the group is not testable from aggregate data on group behavior.     

Dynamic and stochastic structures in tourism demand modeling

In this paper we consider a model for international tourism demand. The point of departure of the analysis is a utility function that is both dynamic and stochastic. In the model the stochastic component is interpreted as random changes in preferences for goods and services, while the dynamic component can be seen as either habit formation or as interdependent preferences. The resulting demand functions are estimated as a multivariate state space model, where the stochastic components enter the model as stochastic seasonal and trend components. An application is constructed for different segments of the Swedish tourism market. The results indicate the importance of including both dynamic and stochastic components in the utility function, and the importance of using disaggregate data to enable investigation of each market segment.I am grateful to two anonymous referees for useful comments. Much of the research was done while I was a visiting scholar at University of California Berkeley. The hospitality of the RIPM division is gratefully acknowledged. The research was supported by grants from the Wallander Foundation.First version received: January 2003/Final version received: February 2004