Linquad: An Incomplete Demand System Approach to Demand Estimation and Exact Welfare Measures

Abstract

The use of an incomplete demand system approach facilitates the exploration of a new functional form for applied demand analysis. LinQuad is a flexible form, linear in income and linear and quadratic in prices. A generalized PIGL form of LinQuad is introduced which nests LinQuad is introduced which nests LinQuad an an AIDS-like PIGLOG form. Three levels of theoretical restrictions, symmetry, joint symmetry and concavity, and concavity conditional on symmetry, are not rejected at the 5% and 1% level of significance for the optimal generalized PIGL form and LinQuad, respectively. These empirical models thus meets all integrability conditions. Two hypothetical welfare applications to the dairy industry illustrate the dangers of using a misspecified PIGLOG model for policy evaluation.