Quadratic Engel Curves and Consumer Demand

The Review of Economics and Statistics, Vol. LXXIX, No. 4 (November 1997)

Posted: 1 May 1998

See all articles by James W. Banks

James W. Banks

Institute for Fiscal Studies; The University of Manchester

Richard W. Blundell

UCL; Centre for Economic Policy Research (CEPR)

Arthur Lewbel

Boston College - Department of Economics

Abstract

This paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices. A nonparametric analysis of consumer expenditure patterns suggests that Engel curves require quadratic terms in the logarithm of expenditure. While popular models of demand such as the Translog or the Almost Ideal Demand Systems do allow flexible price responses within a theoretically coherent structure, they have expenditure share Engel curves that are linear in the logarithm of total expenditure. We derive the complete class of integrable quadratic logarithmic expenditure share systems. A specification from this class is estimated on a large pooled data set of U.K. households. Models that fail to account for Engel curvature are found to generate important distortions in the patterns of welfare losses associated with a tax increase.

JEL Classification: D11, D12

Suggested Citation

Banks, James W. and Blundell, Richard W. and Lewbel, Arthur, Quadratic Engel Curves and Consumer Demand. The Review of Economics and Statistics, Vol. LXXIX, No. 4 (November 1997), Available at SSRN: https://ssrn.com/abstract=82389

James W. Banks

Institute for Fiscal Studies ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

The University of Manchester

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Richard W. Blundell (Contact Author)

UCL ( email )

Department of Economics
Gower Street
London, WC1E 6BT
United Kingdom
+44 20 7504 5863 (Phone)
+44 20 7916 2773 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctp39a/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Arthur Lewbel

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3678 (Phone)
617-552-2308 (Fax)

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