Engel Flexibility in Household Budget Studies: Non-parametric Evidence versus Standard Functional Forms

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Rimmer, Maureen T and Powell, Alan (1994) Engel Flexibility in Household Budget Studies: Non-parametric Evidence versus Standard Functional Forms. Working Paper. Centre of Policy Studies (CoPS).


At least since the mid-1970s, the emphasis in applied demand analysis has been on a flexible specification of substitution effects. Recent theoretical work by Cooper and McLaren (1992a, 1992b and 1996) and Cooper, McLaren and Parameswaran (1994) has put more emphasis on effectively globally regular systems which allow greater flexibility in the treatment of Engel effects. However, current empirical work continues to use a relatively inflexible treatment of Engel effects. Following Lewbel's (1991) lead, in the present paper we attempt to evaluate the need for a more flexible treatment by examining Engel effects in the Australian Household Expenditure Survey for 1988-89 from an agnostic position in which the form of the Engel response is entirely data-determined. We do this using non-parametric procedures in the statistical package S-Plus. Contrary to common practice (and confirming Lewbel's empirical results for U.K. and U.S. data), we find evidence of non-monotonic responses of budget shares with increasing income. This argues in favour of more flexible forms for Engel curves such as those explored in recent work by Cooper and McLaren (1996) and by Rimmer and Powell (1992a, 1992b and 1996). Using the same methodology, we also carry out a brief exploration of the influence of demographic effects on household Engel responses.

Additional Information

CoPS/IMPACT Working Paper Number OP-79

Item type Monograph (Working Paper)
URI https://vuir.vu.edu.au/id/eprint/29391
Official URL http://www.copsmodels.com/elecpapr/op-79.htm
ISBN 0732607175
Subjects Historical > FOR Classification > 1403 Econometrics
Current > Division/Research > Centre of Policy Studies (CoPS)
Keywords C13; C14; D12; consumer demand systems; consumption expenditure; household composition; non-parametric regression; budget shares; demographic effects
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