Towards a more general approach to testing the time additivity hypothesis

A new procedure is proposed for re-examining the assumption of additivity of preferences over time which, although untenable, is usually maintained in intertemporal analyses of consumption and labour supply. The method is an extension of a famous work by Browning. However, it is more general in permitting the estimation of intertemporal demand systems, which are explicit in an unobservable variable (price of utility), but may lack a closed form representation in terms of observable variables such as prices and total outlay. It also makes extensive use of duality theory to solve the endogeneity problem encountered in Browning's study. Applying this method with an appropriate estimator to the Australian aggregate data, it is found that the time additivity hypothesis is decisively rejected, which is consistent with Browning's conclusion.