Estimating Elasticities with the Linear Approximate Almost Ideal Demand System: Some Monte Carlo Results

Abstract

The almost ideal demand system (AIDS) model has many desirable theoretical properties but usually it is estimated using a linear approximation. The quality of the approximation to the true AIDS depends on the parameters and the collinearity among the exogenous price variables. In the literature, four alternative formulas have been used to compute elasticities of a demand system that is assumed to be of the AIDS form using parameters estimated in the linear approximate AIDS. Month Carlo experiments indicate that two of those four alternatives, as typically applied, are highly inaccurate but the other two are quite accurate. Copyright 1994 by MIT Press.