Shape-Invariant Demand Functions

Shape invariance is a property of demand functions that is widely used for parametric and semiparametric modeling and is associated with a commonly employed class of equivalence scale models used for welfare calculations. This paper derives the set of all shape-invariant demand functions and associated preferences. All previously known shape-invariant demands were derived from utility functions that, up to monotonic transformation, are called IB/ESE (independent of base-equivalence scale exact) utility functions, because they yield IB/ESE equivalence scales. This paper shows that there exist exceptional shape-invariant demands that are not derived from a transform of IB/ESE utility and provides some simple tests for these exceptions. In particular, all the exceptions have rank 2, so any rank 3 or higher demand system is shape invariant if and only if it is derived from a transform of IB/ESE utility. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.