The negativity condition in consumer demand

Abstract

Abstract The study stresses the importance of one relatively neglected restriction on demand equations: the negativity condition (i.e., the necessity of a negative semidefinite substitution matrix). That condition is implemented by using the Cholesky decomposition. It implies nonlinear combinations of the parameters which are estimated by a maximum likelihood procedure. The method, applied to Dutch and German data, leads to an acceptance of the theoretical restrictions stemming from consumer theory.