Estimating demand with distance functions: Parameterization in the primal and dual

Rolf Färe, Shawna Grosskopf, Kathy J. Hayes and Dimitris Margaritis

Journal of Econometrics, 2008, vol. 147, issue 2, 266-274

Abstract: Our purpose is to investigate the ability of different parametric forms to 'correctly' estimate consumer demands based on distance functions using Monte Carlo methods. Our approach combines economic theory, econometrics and quadratic approximation. We begin by deriving parameterizations for transformed quadratic functions which are linear in parameters and characterized by either homogeneity or which satisfy the translation property. Homogeneity is typical of Shephard distance functions and expenditure functions, whereas translation is characteristic of benefit/shortage or directional distance functions. The functional forms which satisfy these conditions and include both first- and second-order terms are the translog and quadratic forms, respectively. We then derive a primal characterization which is homogeneous and parameterized as translog and a dual model which satisfies the translation property and is specified as quadratic. We assess functional form performance by focusing on empirical violations of the regularity conditions. Our analysis corroborates results from earlier Monte Carlo studies on the production side suggesting that the quadratic form more closely approximates the 'true' technology or in our context consumer preferences than the translog.

Keywords: Distance; functions; Demand; Approximation; Quadratic; Translog; Monte; Carlo (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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