Aggregation without Separability: A Generalized Composite Commodity Theorem

Arthur Lewbel

American Economic Review, 1996, vol. 86, issue 3, 524-43

Abstract: This paper provides general conditions for aggregating commodities without separable utility. These conditions impose weaker and more empirically plausible restrictions on price movements than the currently existing alternative to separability, the Hicks-Leontief composite commodity theorem. The idea is to allow departures from Hicks-Leontief that take the form of well-behaved error terms. Utility functions that permit generalized composite commodity aggregation include the AIDS model, the translog, all homothetic utility functions, and any utility function when demands are aggregated to two groups of goods. Implications of empirical nonstationarity of relative prices for aggregation and demand estimation are considered. Copyright 1996 by American Economic Association.

Date: 1996
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