Quality, quantity, and spatial variation of price: Back to the bog
John Gibson () and
Journal of Development Economics, 2019, vol. 137, issue C, 66-77
Estimating potential effects of price reforms is a key issue for many developing countries. Demand studies increasingly use household survey data on budget shares, which vary with quantity, price, and quality. If quality response to price is ignored, estimated price elasticities of quantity demand conflate responses on quantity and quality margins. Our review finds over 80% of published studies using budget shares from household survey data have this error. We use survey data from Vietnam, with prices and qualities observed over space, to directly estimate the price elasticity of quality. This is much larger than what is derived from the income elasticity of quality, based on the Deaton (1988) separability restrictions. Across the 45 items we study, the own-price elasticity of quantity demand is overstated by a factor of four, on average, if the response of quality to price is ignored.
Keywords: Demand; Household surveys; Quality; Price reform; Unit values; Separability (search for similar items in EconPapers)
JEL-codes: C81 D12 (search for similar items in EconPapers)
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Working Paper: Quality, Quantity and Spatial Variation of Price: Back to the Bog (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:137:y:2019:i:c:p:66-77
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