Price Elasticities from Survey Data: Extensions and Indonesian Results

Abstract

For many questions of public policy, it is important to know how consumers change their expenditures on goods in response to changes in prices. For developing countries, there are typically rather few time series data from which price elasticities can be inferred. By contrast, cross-sectional household expenditure surveys are available for many LDCs. In Deaton (1986, 1987) I developed a methodology for using such household survey data to detect spatial variation in prices, and to estimate price elasticities by comparing spatial price variation to spatial demand patterns. In the first paper, I showed how to estimate the own-price elasticity for a single good by comparing its demand to its price. In the second paper, the methodology was extended to cover systems of demand functions, so that cross-price elasticities could be estimated, and substitution patterns studied.

The author would like to thank Dwayne Benjamin who provided outstanding research assistance. The research reported here was carried out for the Welfare and Human Resources Division of the World Bank. The World Bank does not accept responsibility for the views expressed herein, which are those of the author and should not be attributed to the World Bank or to its affiliated organisations. This paper was first published in the Journal of Econometrics (1990) vol. 44; permission to reprint it here is gratefully acknowledged.