Connected Substitutes and Invertibility of Demand
30 Pages Posted: 29 Jun 2011
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Connected Substitutes and Invertibility of Demand
Connected Substitutes and Invertibility of Demand
Connected Substitutes and Invertibility of Demand
Date Written: 2011
Abstract
We consider the invertibility of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory requiring uniqueness of market clearing prices. We introduce the notion of, "connected substitutes," and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. These conditions are satisfied in many standard models, have transparent economic interpretation, and allow us to show invertibility without functional form restrictions, smoothness assumptions, or strong domain restrictions.
Keywords: Demand, Invertibility, Connected substitutes
JEL Classification: D01, C3
Suggested Citation: Suggested Citation
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