Estimation of Censored Demand Equations from Large Cross‐Section Data

Abstract

The article develops an alternative econometric methodology to estimate a system of censored demand equations using a large cross‐section data from Colombian urban households. The approach preserves the behavioralinformation expressed by zero expenditures and conforms with the requirements imposed by consumer theory in a way consistent with the random utility hypothesis. We motivate the choice of the Tobit modelas a statistical representation of consumer behavior and introduce the methodology by specifying the AIDS model modified according to both a translating and scaling demographic transformation. We propose to estimate each demand equation in unrestricted form using the jackknife technique. We then recover the demand parameters imposing the cross‐equations restrictions by using minimum distance estimation. The empirical results of the censored demand system for specific households of policy relevance are reported.

Keywords: censored demand, jakknife, large cross‐section data, minimum chi‐squared estimator, scaling and translating, C240, D120, O120