, Volume 22, Issue 2, pp 293-320

Generalized habit formation in an Inverse Almost Ideal Demand System: An application to meat expenditures in the U.S.

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Abstract

The Inverse Almost Ideal Demand System (IAIDS) model of Moschini and Vissa (1992) and Eales and Unnevehr (1994) is extended to include: (1) general, nonlinear, nonadditive habit effects; and (2) a specification for habit stock terms that allows purchases from the distant past to influence current consumption (long memory). The resulting models are compared with a linear habit effects model and a static specification. The empirical estimation is on U.S. quarterly meat expenditures (1961–1993), with each model being subjected to a battery of misspecification tests. Results of these tests, along with tests of homogeneity and symmetry restrictions, indicate clearly that the most generalized dynamic specification-the one with nonlinear, nonadditive long-memory habit stock effects-is preferred. Furthermore, persistence effects are found to be qualitatively important in that flexibility, consumption scale, and habit flexibility estimates differ, in some instances substantially, between alternative specifications.

The authors are associate professors in the Department of Agricultural and Resource Economics at North Carolina State University. This work has been supported by the North Carolina Agricultural Research Service. We are grateful to two anonymous referees for helpful remarks on an carlier version.