Incorporating Non-Unitary Income Elasticities, Choke Prices and Choke Incomes into Applied General-Equilibrium Models

James R. Markusen

No 12159, CESifo Working Paper Series from CESifo

Abstract: Traditional applied general-equilibrium (AGE) models have always faced trade-offs between analytical and computational tractability and counter-empirical restrictions. One is the assumption of homothetic preferences implying unitary income elasticities of demand, significantly inconsistent with data. Similarly, there is no “choke” income level, below which a certain good is not purchased and there is no choke price above which a good is not purchased, implying no changes in the extensive margin of trade. Here I exploit what I will label a Stone-Geary Modified (SGM) formulation. This produces a model in which there are non-unitary income elasticities, choke income levels for some/all goods, and choke prices. The second approach modifies CRIE (constant relative income elasticity) preferences which are preferred for modeling income elasticities, but don’t by themselves permit choke income and prices. While other authors have explored these properties in alternative ways, both my approaches have considerable advantages for high-dimension simulation models in that they retain CES structures and functional forms so that they can slot right into existing modeling formats. They require only small modifications to off-the-shelf cost and expenditure functions, and therefore goods and factor demand functions via Shepard’s lemma. Unobserved parameters can be calibrated from observed data and econometric estimates.

Keywords: income elasticities; choke incomes; choke prices; applied general equilibrium (search for similar items in EconPapers)
JEL-codes: C63 C68 F10 F17 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cmp
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ifo.de/DocDL/cesifo1_wp12159.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12159

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().