Consumer Demand Estimation for Heterogeneous U.S. Households
Paper Number: 2021-05
Document Date: 9/2021
Author(s): Ensieh Shojaeddini, Alex Marten, Andrew Schreiber, and Ann Wolverton
Subject Area(s): Costs of Pollution Control, Distributional Effects
JEL Classification: D11, D12, D58, Q52, Q58
Keywords: Preference Structure; Households; Leisure; CGE; Distributional Effects; Environmental Regulation
Abstract: In this paper, we empirically estimate alternative flexible demand systems for the United States economy and explore the sensitivity of estimates to various levels of household disaggregation by region or income. As part of this evaluation, we consider tradeoffs between different specifications with regards to complexity, regularity, the ability to capture cross-price elasticities, Engel curve flexibility, and the number of commodities that can be reasonably accommodated. We find that price and income elasticities at the national level are statistically significant and of the expected sign across functional form specifications. Our estimated labor supply elasticities are within the expected range for price elasticities, though high for income elasticities in absolute value relative to prior work in the literature. We find that estimated elasticities are relatively similar across U.S. Census regions but vary by income group. We then apply these estimates to a simple computable general equilibrium (CGE) model to explore the implications that the form and parameterization of a consumer demand system can have on the total costs of an illustrative environmental regulation. Specifically, we find that the functional form can have significant implications on the labor-leisure choice leading to differences in social cost estimates. While our aim is to improve the ability to estimate the economy-wide impacts of an environmental regulation, the estimates generated in this paper can inform a much broader class of applied economic analyses.
NOTE: This paper has been updated. The paper is now working paper number 2022-05 titled "Consumer Demand and the Economy-wide Costs of Regulation: Modeling Households with Empirically Estimated Flexible Functional Forms".
This paper is part of the Environmental Economics Working Paper Series.