Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems
28 Pages Posted: 15 Aug 2017
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Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems
Date Written: August 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: CES, CRS production functions, Demand systems with a single aggregator, direct implicit additivity, gross complements and gross substitutes., homothetic preferences, indirect implicit additivity, translog
JEL Classification: D11, D21
Suggested Citation: Suggested Citation