Testing the Adding Up Condition in Demand Systems

Quirino Paris and Francesco Caracciolo

No 171748, Working Papers from University of California, Davis, Department of Agricultural and Resource Economics

Abstract: A test of the adding up condition in demand systems is crucial for determining whether a share format is admissible when the number of sample goods is smaller than the number of commodity choices available to consumers. This test requires the estimation of a demand system in a quantity format. The share specification of any demand system is like a straight jacket: once worn, it forces the error covariance matrix to be singular and the adding up condition to hold whether or not the data generating process warrants it. The empirical verification of the adding up hypothesis uses a five-commodity sample selected from the Canadian Family Expenditure Survey with 4847 observations. Three specifications are considered: AIDS, QUAIDS and EASI. The hypothesis is rejected in all three cases with a high level of confidence.

Keywords: Demand and Price Analysis; Productivity Analysis; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 14
Date: 2014-06-01
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Citations: View citations in EconPapers (1)

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Working Paper: Testing the adding up condition in demand systems (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ucdavw:171748

DOI: 10.22004/ag.econ.171748

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