Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems
31 Pages Posted: 21 Feb 2018 Last revised: 23 Oct 2020
Date Written: October 1, 2017
We characterize three classes of demand systems, all of which are defined nonparametrically: homothetic demand systems with a single aggregator (HSA), those with direct implicit additivity (HDIA), and those with indirect implicit additivity (HIIA). For any number of goods, all the cross-price effects are summarized by one price aggregator in the HSA class and by two price aggregators in the HDIA and HIIA classes. 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, essential (indispensable) goods, inessential (dispensable) goods
JEL Classification: D11, D21
Suggested Citation: Suggested Citation