Speaker: Ethan Ligon is an Associate Professor of Agricultural and Resource Economics at UC Berkeley. More »
Abstract: Understanding how marginal utilities of expenditure evolve over time is key to the specification, the estimation, and the testing of dynamic consumer behavior. But in existing dynamic models researchers often rely on an assumption that Engel curves are linear. This allows one to specify marginal utilities as a function of nothing more than real expenditures, but is sharply at odds with strong empirical evidence against linearity, including Engel's Law. Here we show how one can use panel data on disaggregate expenditures to estimate demand systems that may feature highly non-linear Engel curves; this same estimation procedure yields summary measures of household welfare within the period which we call "neediness".
Our neediness measure is of interest in its own right, and can also be used to construct measures of inequality and poverty which match conventional measures given prevailing prices, but which also describe how inequality and poverty would be different were prices different. Beyond this, it is intimately related to the marginal utilities of expenditure that are critical in dynamic models.
We illustrate the use of these methods using data from Uganda to estimate an incomplete demand system; to estimate household neediness in different periods; and finally to use our estimates of neediness to test for full insurance in Uganda.
Last Updated: Nov 02, 2015