Demographic versus expenditure flexibility in Engel curves

We consider the effects of demographic and expenditure variables on consumer demand in a system of Engel curves using a smooth coefficient semiparametric model where the expenditure effects on the budget shares vary nonparametrically with demographic variables such as the age of head and number of children in the household. Our findings, based on UK micro data, suggest that with a smooth coefficient semiparametric model there is no need for nonlinear logarithmic expenditure effects in the budget shares. Furthermore, we find evidence of a trade-off between demographic and expenditure effects in Engel curves and that a rank-2 system of Engel curves where the logarithmic expenditure effects are allowed to vary with demographic characteristics either nonparametrically or as a third degree polynomial function cannot be rejected against a rank-3 (quadratic logarithmic) model. The implications on household behavior and welfare are also examined. We would like to thank an anonymous referee and Baldev Raj, the editor, for useful comments and suggestions. We would also like to thank the University of Cyprus for financial support, Theofanis Mamuneas for stimulating discussions and the Office of National Statistics for making available the UK Family Expenditure Survey data through the ESRC Data Archive. The last author would also like to acknowledge the financial support from SSHRC of Canada.