Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems

31 Pages Posted: 21 Feb 2018 Last revised: 23 Oct 2020

See all articles by Kiminori Matsuyama

Kiminori Matsuyama

Northwestern University - Department of Economics

Philip Ushchev

HSE University

Date Written: October 1, 2017

Abstract

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

Matsuyama, Kiminori and Ushchev, Philip, Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems (October 1, 2017). Global Poverty Research Lab Working Paper No. 17-109, Available at SSRN: https://ssrn.com/abstract=3126492 or http://dx.doi.org/10.2139/ssrn.3126492

Kiminori Matsuyama (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
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Philip Ushchev

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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