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The implications of mean scaling for the calculation of aggregate consumer elasticities

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Abstract

Mean scaling is a common assumption in the estimation of aggregate consumer elasticities—in particular, expenditure elasticities, but also (implicitly) compensated price elasticities. The assumption is that each household’s income changes in the same proportion as aggregate income. If correct, that implies no bias in the use of aggregate data for estimation of expenditure elasticities. If incorrect, though, there may be substantial bias, especially if there is a high degree of inequality in the underlying income distribution, and regardless of whether one uses micro or aggregate data. We explore this issue, both theoretically and illustratively, using realistic (empirically derived) elasticity estimates coupled with relatively high and low degrees of income inequality.

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Authors and Affiliations

  1. Department of Economics, McMaster University, 1280 Main Street West, Hamilton, L8S 4M4, Canada

    Frank T. Denton

  2. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, L8S 4M4, Canada

    Dean C. Mountain

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  1. Frank T. Denton
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  2. Dean C. Mountain
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Correspondence to Dean C. Mountain.

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Appreciation is extended to the editor and two anonymous reviewers for their helpful comments and suggestions.

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Denton, F.T., Mountain, D.C. The implications of mean scaling for the calculation of aggregate consumer elasticities. J Econ Inequal 12, 297–314 (2014). https://doi.org/10.1007/s10888-013-9256-5

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  • DOI: https://doi.org/10.1007/s10888-013-9256-5

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