Using Double-Log Imperfect Import Substitutes Model to Estimate Compensated Elasticities and Welfare Impacts

Decisions on the effects of safeguard mechanisms have been more on theoretical grounds often due to lack of precise estimation of elasticities that can be used to calibrate welfare effects. Alston et.al., (2002) demonstrate that the double logarithmic demand models can be augmented by Slutsky equation to create compensated demand equations which, when estimated result into precise compensates elasticities important for welfare analysis. This study demonstrates a similar adjustment on a dynamic double log Imperfect Import substitutes model to allow for estimation of compensated and uncompensated elasticities. Elasticities from three estimators OLS, SURE and IV indicate that imported wheat, maize and rice are normal commodities in Kenya. The uncompensated elasticities are bigger in magnitude than the compensated elasticities. Focusing on wheat, these compensated elasticities are subsequently used to estimate welfare measures of import tariffs or safeguard mechanisms through the manifested price changes. Results favour a non-tariff wheat importation regime and also favor consumer protection. The study recommends removal of the tariff rate and alternative ways of improving domestic wheat production rather than import restrictions.