American Journal of Agricultural Economics · 1994 · 222 citations · 12 references
Social SciencesBusiness EconomicsEconomicsEconometricsMicroeconomicsPricing TheoryConsumer Demand AnalysisDemand AnalysisDemand TheoryElasticity AnalysisPrice ElasticityDemand Elasticity AnalysisDemand Elasticity MeasurementDemand Elasticity ModelingEconometric Demand ModelsElasticityMonte Carlo AnalysisPrice Elasticity Modeling
Linearizing the Almost Ideal Demand System (LAIDS) using the Stone share‑weighted price index is a common practice. The study addresses two issues: the errors‑in‑variables implications of LAIDS linearization and the development of alternative elasticities for the LAIDS model. The authors document the inconsistency of the SUR estimator and the lack of a consistent IV estimator, and evaluate alternative elasticities through a Monte Carlo investigation. They find that the SUR estimator is inconsistent, no consistent IV estimator can be constructed, the proposed alternatives and the Green‑Alston elasticities offer no advantage over conventional formulas, and they correct errors in the Green‑Alston (1990) paper.
Abstract Linearizing the Almost Ideal Demand System (LAIDS) by recourse to the Stone share weighted price index is common practice. Two issues are addressed here. First, scrutiny of the errors‐in‐variables implications of the linearization reveals that, not only is the SUR estimator inconsistent, but a consistent IV estimator cannot be constructed. Second, some alternatives to the Green‐Alston elasticities specifically designed for the LAIDS model are developed, but neither these nor the Green‐Alston elasticities are found to have any advantages over the conventional elasticity formulae. Some errors in the Green‐Alston (1990) paper are corrected. The inconsistency and elasticity issues are documented by a Monte Carlo investigation.
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