Modelling Household Spending Using a Random Assignment Scheme

Applied demand analysis is usually done by specifying some kind of econometric equation but there are some difficulties associated with this approach. These include the problem of modelling at a highly disaggregated level and the amount of data needed to estimate the parameters for the equations. This paper examines the use of what are known as random assignment schemes as a way to model household expenditure. This approach is based on the idea of predicting the behavioural response of a microsimulation unit by finding a donor, which is in some sense similar to the receiving unit. The paper begins with a brief review of econometric modelling. It then introduces the principles of random assignment schemes. These are expanded upon in an illustrative example to model the effect of changes in the level of income on household expenditure patterns. The model is then used as a platform to show how the random assignment scheme can be used to model a large number of goods, at the level of individual households.