30 Pages Posted: 11 Jul 2011
Date Written: July 2011
We consider the invertibility of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory requiring uniqueness of market clearing prices. We introduce the notion of "connected substitutes" and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. These conditions are satisfied in many standard models, have transparent economic interpretation, and allow us to show invertibility without functional form restrictions, smoothness assumptions, or strong domain restrictions.
Suggested Citation: Suggested Citation
Berry, Steven and Gandhi, Amit and Haile, Philip A., Connected Substitutes and Invertibility of Demand (July 2011). NBER Working Paper No. w17193. Available at SSRN: https://ssrn.com/abstract=1882161