On the Estimation of Demand Systems Through Consumption Efficiency

We consider a Bayesian implementation of a new approach to estimating Demand Systems. This approach, suggested by Varian (1990), is based on a generalization of Afriat's (1967) efficiency index. The model we propose leads to a very tractable posterior and predictive analysis, yet allows for interesting economic interpretations. We conduct a sensitivity analysis with respect to the prior in an application to annual aggregate U.S. consumption data, and conclude that the sample is quite informative. Average efficiency and expected budget shares are examined in some detail.