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American Economic Review: Vol. 99 No. 3 (June 2009)

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Tricks with Hicks: The EASI Demand System

Article Citation

Lewbel, Arthur, and Krishna Pendakur. 2009. "Tricks with Hicks: The EASI Demand System." American Economic Review, 99(3): 827-63.

DOI: 10.1257/aer.99.3.827

Abstract

We invent Implicit Marshallian demands, which combine desirable features of Hicksian and Marshallian demands. We propose and estimate the Exact Affine Stone Index (EASI) implicit Marshallian demand system. Like the Almost Ideal Demand (AID) system, EASI budget shares are linear in parameters given real expenditures. However, unlike the AID, EASI demands can have any rank and its Engel curves can have any shape over real expenditures. EASI error terms equal random utility parameters to account for unobserved preference heterogeneity. EASI demand functions can be estimated using GMM or three stage least squares, and, like AID, an approximate EASI model can be estimated by linear regression. (JEL D11, D12)

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Authors

Lewbel, Arthur (Boston College)
Pendakur, Krishna (Simon Fraser U)

JEL Classifications

D11: Consumer Economics: Theory
D12: Consumer Economics: Empirical Analysis


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