Empirical Evidence on the Law of Demand

Wolfgang Härdle, Werner Hildenbrand and Michael Jerison

Econometrica, 1991, vol. 59, issue 6, 1525-49

Abstract: For market demand to satisfy the law of demand, it is sufficient that the mean of all households' income effect matrices is positive definite. The authors show how this mean income effect matrix can be estimated from cross section data under metonymy, an assumption about the distribution of household characteristics. The estimation uses the nonparametric method of average derivatives. When the method is applied to U.K. family expenditure data, the estimated mean income effect matrices are positive definite. This can be explained by a special form of heteroskedasticity in the data: households' demands are more dispersed at higher income levels. Copyright 1991 by The Econometric Society.

Date: 1991
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