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Distribution of Preferences and Measurement Errors in a Disaggregated Expenditure System+

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Abstract
A complete system of consumer expenditure functions with 28 commodity groups is modelled and estimated by means of Norwegian household panel data. Measurement errors are carefully modelled. Total consumption expenditure is modelled as a latent variable, purchase expenditures on different goods and two income measures are considered as indicators of this basic variable. The distribution of individual differences in preferences, represented by individual, time invariant latent variables in the expenditure functions, is structured by means of a two level utility tree which permits a parsimonious parameterization. The usual assumption of no measurement error in total expenditure is clearly rejected. The standard assumption in factor analysis of uncorrelated measurement errors is also clearly rejected. In particular, we find positive correlation between measurement errors (purchase residuals) of food groups which may be explained by rational shopping behavior of the households. The purchase residuals for automobiles show negative serial correlation and positive correlation with the volatile components of latent total expenditure, which is reasonable for such a durable good. The first and second order moments of the observed variables, which are the input in the analysis, consist of 2015 elements which is modelled by means of 213 structural parameters in our reference model. The maximum likelihood estimates of the latter have, with only a few exceptions, the expected sign and a reasonable size.

Suggested Citation

  • Jørgen Aasness & Erik Biørn & Terje Skjerpen, 1995. "Distribution of Preferences and Measurement Errors in a Disaggregated Expenditure System+," Discussion Papers 149, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:149
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    Cited by:

    1. Jørgen Aasness & Odd Erik Nygård, 2009. "Revenue functions and Dupuit curves for indirect taxes with cross-border shopping," Discussion Papers 573, Statistics Norway, Research Department.
    2. Meijer, Erik & Spierdijk, Laura & Wansbeek, Tom, 2017. "Consistent estimation of linear panel data models with measurement error," Journal of Econometrics, Elsevier, vol. 200(2), pages 169-180.
    3. Jørgen Aasness & Odd Nygård, 2014. "Revenue functions and Dupuit curves for indirect taxes with cross-border shopping," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(2), pages 272-297, April.
    4. Eva Ventura & Albert Satorra, 1998. "Lyfe-cycle effects on household expenditures: A latent-variable approach," Economics Working Papers 354, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Sverre Grepperud, 1997. "Soil Depletion Choices under Production and Price Uncertainty," Discussion Papers 186, Statistics Norway, Research Department.

    More about this item

    Keywords

    Consumer demand; Engel functions; panel data; preference distributions; latent total expenditure; measurement errors; household expenditure surveys.;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • D1 - Microeconomics - - Household Behavior
    • D3 - Microeconomics - - Distribution

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