Abstract

Ever since Richard Stone (1954) first estimated a system of demand equations derived explicitly from consumer theory, there has been a continuing search for alternative specifications and functional forms. Many models have been proposed, but perhaps the most important in current use, apart from the original linear expenditure system, are the Rotterdam model (see In Section I of the paper, we discuss the theoretical specification of the AIDS and justify the claims in the previous paragraph. In Section II, the model is estimated on postwar British data and we use our results to test the homogeneity and symmetry restrictions. Our results are consistent with earlier findings in that both sets of restrictions are decisively rejected. We also find that imposition of homogeneity generates positive serial correlation in the errors of those equations which reject the restrictions most strongly; this suggests that the now standard rejection of homogeneity in demand analysis may be due to insufficient attention to the dynamic aspects of consumer behavior. Finally, in Section III, we offer a summary and conclusions. We believe that the results of this paper suggest that the AIDS is to be recommended as a vehicle for testing, extending, and improving conventional demand analysis. This does not imply that the system, particularly in its simple static form, is to be regarded as a fully satisfactory explanation of consumers' behavior. Indeed, by proposing a demand system which is superior to its predecessors, we hope to be able to reveal more clearly the problems and potential solutions associated with the usual approach. I. Specification of the AIDS In much of the recent literature on systems of demand equations, the starting point has been the specification of a function which is general enough to act as a second-order approximation to any arbitrary direct or indirect utility function or, more rarely, a cost function.