Semiparametric indirect utility and consumer demand

In this paper, we specify the indirect utility function as a partially linear model, where utility is nonparametric in expenditure and parametric (with fixed- or varying-coefficients) in prices. Since we start with a model of indirect utility, rationality restrictions like homogeneity and Slutsky symmetry are easily imposed. The resulting model for expenditure shares (as function of expenditures and prices) is locally given by a fraction whose numerator is partially linear, but whose denominator is nonconstant and given by the derivative of the numerator. Our basic insight is that given a local polynomial model for the numerator, the denominator is is given by a lower-order local polynomial. The model is thus easily estimated using modified versions of standard local polynomial modeling techniques. We provide Monte Carlo evidence that the proposed techniques work, and implement the model on Canadian consumer expenditure and price micro-data.

• Type: Journal
• Year: 2010
• Where: CSDA
• Authors: Krishna Pendakur, Michael Scholz, Stefan Sperlich
• Keywords: CSDA 2010, Indirect Utility, Local Polynomial, Model