Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system

Abstract.  While it is well known that demand elasticities calculated at the macro level will in general differ from those calculated at the micro level because of aggregation effects, there remain the questions of how large the effects are and how they vary with the degree of inequality in the income distribution. We explore these questions with models based on a quadratic version of the Almost Ideal Demand System. We investigate the elasticity differences theoretically and then calibrate the models and generate numerical results, using income data for seven countries with widely different distributions. The aggregation effects are found generally to be rather small, even with highly unequal income distributions.     

Exploring the effects of aggregation error in the estimation of consumer demand elasticities

Errors introduced by using aggregate data in estimating a consumer demand model have long been a concern. We study the effects of such errors on elasticity estimates derived from AIDS and QUAIDS models. Based on a survey of published articles, a generic parameterization of the income distribution, and the range of Gini coefficients reported for 28 OECD countries, we generate and analyze a large number of “observations” on the differences between elasticities calculated at the aggregate level and those calculated at the micro level. We suggest a procedure for evaluating the likely range of aggregation error when a model is estimated with aggregate data.     

Combining stated and revealed choice research to simulate the neighbor effect: The case of hybrid-electric vehicles

According to intuition and theories of diffusion, consumer preferences develop along with technological change. However, most economic models designed for policy simulation unrealistically assume static preferences. To improve the behavioral realism of an energy–economy policy model, this study investigates the “neighbor effect,” where a new technology becomes more desirable as its adoption becomes more widespread in the market. We measure this effect as a change in aggregated willingness to pay under different levels of technology penetration. Focusing on hybrid-electric vehicles (HEVs), an online survey experiment collected stated preference (SP) data from 535 Canadian and 408 Californian vehicle owners under different hypothetical market conditions.Revealed preference (RP) data was collected from the same respondents by eliciting the year, make and model of recent vehicle purchases from regions with different degrees of HEV popularity: Canada with 0.17% new market share, and California with 3.0% new market share. We compare choice models estimated from RP data only with three joint SP–RP estimation techniques, each assigning a different weight to the influence of SP and RP data in coefficient estimates. Statistically, models allowing more RP influence outperform SP influenced models. However, results suggest that because the RP data in this study is afflicted by multicollinearity, techniques that allow more SP influence in the beta estimates while maintaining RP data for calibrating vehicle class constraints produce more realistic estimates of willingness to pay. Furthermore, SP influenced coefficient estimates also translate to more realistic behavioral parameters for CIMS, allowing more sensitivity to policy simulations.     

Financial Knowledge and “Don't Know” Response

We investigate the effect of group characteristics and educational interventions on young respondents' objective financial knowledge level. We examine six questions about personal finance and covariates selected from the 2015 National Financial Capability Study. Because these questions include “Don't Know” or “Refuse” (DK/RF) responses, a simple regression model could cause researchers to reach misleading conclusions if DK/RF responses are not random. Thus, we suggest a binomial‐latent regression model to evaluate the effect of educational interventions and group differences that are hidden in DK/RF responses. The estimation result shows that rejecting financial education opportunities is disadvantageous to obtaining proper financial knowledge. In addition, both formal and informal financial education are less effective in improving objective financial knowledge in our preferred model. We also find few or no gender, income, and age differences in young adults' objective financial knowledge level after controlling for financial education interventions.     

Productivity and energy price differentials

In taking account of the interrelationship between energy and other primary resources, labour and capital, this paper presents a methodology for quantifying regional efficiency differentials using Taylor series approximations to profit functions representing regional economies. The resulting formulation makes it possible to decompose labour productivity into its contributing factors which now include energy price differentials in addition to such traditional variables as differentials involving capital-employee ratios and the quality of labour. This approach is applied to Canadian regional data from 1962 to 1978. On average, between 5.2% and 9.2% of Canadian regional productivity differentials can be attributed to regional energy price differentials.     

Measuring returns to scale and technological change in co-operative banks: A provincial analysis of Canadian credit unions and caisses populaires

In Canada economies of scale in credit unions come not only from large single office arrangements but from external economies realized from belonging to central provincial credit unions. Making use of aggregate provincial time series and cross-sectional data, this study begins by employing a sequential Akaike's Information Criterion (AIC) test to select the most appropriate model. This procedure permits the isolation of economies of scale from technological change effects. For all provinces, economies of scale are discovered to be significantly different from 1, and for five of the eight provinces examined, technological change was statistically significant from zero. The larger the provincial organization, as illustrated by the Quebec caisses populaires, the higher we find estimates of returns to scale and technological change. An implication may be that both expansion and more centralization should be encouraged and that other provinces may be able to increase efficiency by imitating some of Quebec's operational and administrative practices.     

Errors of aggregation and errors of specification in a consumer demand model: a theoretical note

Abstract .  Consumer demand models based on the concept of a representative or average consumer suffer from aggregation error. Misspecification of the underlying micro utility-maximizing model, which is virtually inevitable, also results in error. This note provides a theoretical investigation of the relationship between the two types of error. Misspecified expenditure support functions for demand systems at the micro level induce the same misspecified structure in the corresponding expenditure functions at the macro level, and the errors at the two levels are shown to be of similar order.     

Spanning and completeness with options

The role of ordinary options in facilitating the completionof securities markets is examined in the context of a modelof contigent claims sufficiently general to accommodate thecontinuous distributions of asset pricing theory and optionpricing theory. In this context, it is shown that call optionswritten on a single security approximately span all contingentclaims written on this security and that call options writtenon portfolios of call options on individual primitive securitiesapproximately span all contingent claims that can be writtenon these primitive securities. In the case of simple options,explicit formulas are given for the approximating options andportfolios of options. These results are applied to the pricingof contingent claims by arbitrage and to irrelevance propositionsin corporate finance.     

The response of aggregate production to fertility-induced changes in population age distribution

With a particular focus upon long-term supply effects, the authors explored the implications of different population age distributions for the productive capacity of an economy. A multilevel aggregate production process was specified, plausible values assigned to its parameters, and steady-state solutions obtained under a range of alternative fertility assumptions. The theoretical model was calibrated to conform with Canadian data and published estimates of age-sex substitution elasticities. The study found productive capacity to be related to age distribution, although the output effects exceed 8%, regardless of the structure of the economy, only when total fertility rate is less than 1.6 or well above 3.0; within the range of variation, productive capacity and output per capita are lower for both younger and older populations; altering the elasticity of substitution between different tasks has negligible effects upon the sensitivity of the economy to changes in age distribution; altering the elasticity of substitution between different age-sex groups for a given task has a markedly greater effect; introducing either increasing or decreasing returns to scale has only a minor effect upon the sensitivity of the economy to changes in age distribution; and marginal products are quite sensitive to changes in age distribution for both younger and older workers, but far less sensitive for middle-aged workers.