GTAP Resources: Resource Display
| GTAP Resource #6071 |
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"Estimation of an Implicit Additive Indirect Demand System" by Yang, Anton and Paul Preckel Abstract Preference structures in applied general equilibrium models are often limited to constant-elasticity-of-substitution (CES) forms due to the desire for global regularity. Hanoch (1975) presents indirect, implicit additive relationships as a generalization of CES, providing more flexible and globally regular demand relationships. These preferences decouple substitution and income effects beyond homotheticity relaxation and exhibit greater flexibility than their direct dual. However, the estimation of these models as demand systems has proven to be challenging, with most published work in this area focusing on estimation approaches that involve approximations or cannot fully identify parameter values in the preference relationships. Our approach is direct, avoids approximations, and allows parameter identification. Using the unpublished World Bank (International Comparison Program) database, we estimate the constant difference of elasticity or CDE directly in a maximum likelihood framework. We show that the global regularity conditions stated in Hanoch (1975) can be slightly relaxed, and that the relaxed parametric conditions facilitate estimation. We introduce a normalization scheme that is beneficial for the scaling of the parameter values and which appears to have little impact on the economic performance of the estimated system. Our methodology bears a conceptual resemblance to Berry (1994), yet sets itself apart by calculating utility levels via constrained optimization, all while maintaining a transparent and tractable numerical procedure for estimating general demand models. (note: this abstract is updated as of 03/24) |
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- Calibration and parameter estimation |
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Last Modified: 9/15/2023 1:05:45 PM
