Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems

27 Pages Posted: 8 Aug 2017

See all articles by Kiminori Matsuyama

Kiminori Matsuyama

Northwestern University - Department of Economics

Philip Ushchev

HSE University

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

We characterize three classes of demand systems, all of which are defined non-parametrically: homothetic demand systems with a single aggregator (HSA), those with direct implicit additivity (HDIA), and those with indirect implicit additivity (HIIA). In HSA, all the cross-price effects are captured by one price aggregator, while in HDIA and in HIIA, they are captured by two price aggregators. Each of these three classes contains CES as a special case. Yet, they are pairwise disjoint with the sole exception of CES. Thus, these classes of homothetic demand systems offer us three alternative ways of departing from CES.

Keywords: Homothetic Preferences, CRS Production Functions, Demand Systems with a Single Aggregator, Direct Implicit Additivity, Indirect Implicit Additivity, CES, Translog, Gross Complements, Gross Substitutes

JEL Classification: D11, D21

Suggested Citation

Matsuyama, Kiminori and Ushchev, Philip, Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems (July 2017). Higher School of Economics Research Paper No. WP BRP 172/EC/2017, Available at SSRN: https://ssrn.com/abstract=3015279 or http://dx.doi.org/10.2139/ssrn.3015279

Kiminori Matsuyama

Northwestern University - Department of Economics ( email )

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Philip Ushchev (Contact Author)

HSE University ( email )

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Saint-Petersburg, Saint Petersburg 191119
Russia

HOME PAGE: http://https://sites.google.com/site/philipushchev/

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