Bounding Counterfactual Demand with Unobserved Heterogeneity and Endogenous Expenditures

KU LEUVEN - Discussion Paper Series DPS17.14, November 2017

47 Pages Posted: 8 Dec 2017

See all articles by L. Cherchye

L. Cherchye

KU Leuven; Erasmus Research Institute of Management (ERIM)

Thomas Demuynck

Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE)

Bram De Rock

Katholieke Universiteit Leuven Campus Kortrijk (KULAK)

Date Written: November 8, 2017

Abstract

We propose a novel method to predict rational counterfactual demand responses from an observed set of repeated cross-sections. Our method derives bounds on the distribution of counterfactual demands that are consistent with the Weak Axiom of Revealed Preferences without putting any restriction on the preference heterogeneity across consumers. In contrast to existing methods, our method also allows for endogeneity of total expenditures. In addition, the method can readily incorporate restrictions on the income elasticities of the consumption goods, which further enhances its identifying power (i.e. tighter bounds). The method is easy to implement and yields informative bounds on demand, which we illustrate through an application to data drawn from the U.S. Consumer Expenditure Survey (CEX).

Keywords: unobserved heterogeneity, endogenous expenditures, WARP, counterfactual demand

JEL Classification: C14, D12

Suggested Citation

Cherchye, Laurens and Demuynck, Thomas and De Rock, Bram, Bounding Counterfactual Demand with Unobserved Heterogeneity and Endogenous Expenditures (November 8, 2017). KU LEUVEN - Discussion Paper Series DPS17.14, November 2017, Available at SSRN: https://ssrn.com/abstract=3082332 or http://dx.doi.org/10.2139/ssrn.3082332

Laurens Cherchye (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Thomas Demuynck

Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Bram De Rock

Katholieke Universiteit Leuven Campus Kortrijk (KULAK) ( email )

Etienne Sabbelaan 53
Kortrijk, B-8500
Belgium

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