Demand System Estimations and Welfare Comparisons: Application to Indian Household Data

In this study, we explore the relationship between the rank of a demand system and the estimation results both in terms of consumption behaviour and more importantly in terms of welfare analysis. Money-metric utility levels given by equivalent expenditures are taken as welfare indicators for calculating poverty and inequality measures as they incorporate substitution effects due to relative price changes. Estimations are carried out using relevant data concerning Indian households (rural and urban) collected from nation-wide surveys conducted by the National Sample Survey Organisation (NSSO). We find that although the specification does play an important role in the economic explanation of consumer behaviour with some models being more suited than others depending on the pattern of consumption, welfare comparisons do not change significantly from one model specification to the other. On the other hand, there are notable differences between results based on estimated equivalent expenditures and those based on observed real expenditures.