The econometric modelling of aggregate consumer behaviour

This paper examines several problems involved in modelling the structure of consumer behaviour. A new model of consumer demand is presented which encompasses the indirect translog, the CES and the LES as special cases, enabling nested comparisons to be made. Within this framework we show that acceptance of zero-degree homogeneity and/or symmetry of the Slutsky matrix is heavily dependent upon the structure within which inferential tests are carried out, and that great care must be utilised in formulating nested hypotheses and drawing inferences on the basis of χ2 and F-statistics. We then show that conventional econometric work implies that consumer preferences must be homothetic if symmetry of the Slutsky matrix is imposed. An alternative procedure is suggested and utilised. Finally, we suggest that low Durbin–Watson statistics may arise from misspecification of functional form and may not be due solely to omitted dynamics, as many conjecture.