This paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices. A nonparametric analysis of consumer expenditure patterns suggests that Engel curves require quadratic terms in the logarithm of expenditure. While popular models of demand such as the Translog or the Almost Ideal Demand Systems do allow flexible price responses within a theoretically coherent structure, they have expenditure share Engel curves that are linear in the logarithm of total expenditure. We derive the complete class of integrable quadratic logarithmic expenditure share systems. A specification from this class is estimated on a large pooled data set of U.K. households. Models that fail to account for Engel curvature are found to generate important distortions in the patterns of welfare losses associated with a tax increase.
Authors
CPP Co-Director
James is Senior Research Fellow and Professor of Economics at Manchester, working on broad issues in the economics of retirement, savings and health.
CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
Research Associate Boston College
Arthur is a Research Associate of the IFS and holds the Barbara A. and Patrick E. Roche chair in economics at Boston College.
Journal article details
- Publisher
- MIT
- Issue
- January 1997
Suggested citation
J, Banks and R, Blundell and A, Lewbel. (1997). 'Quadratic Engel curves, welfare measurement and consumer demand' (1997)
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