Working Paper: CEPR ID: DP12667
Authors: Thibault Fally
Abstract: This paper examines demand systems where the demand for a good depends only on its own price, consumer income, and a single aggregator synthesizing information on all other prices. This generalizes directly-separable preferences where the Lagrange multiplier provides such an aggregator. As indicated by Gorman (1972), symmetry of the Slutsky substitution terms implies that such demand can take only one of two simple forms. Conversely, here we show that only weak conditions ensure that such demand systems are integrable, i.e. can be derived from the maximization of a well-behaved utility function. This paper further studies useful properties and applications of these demand systems.
Keywords: separable demand; single aggregator; integrability; recoverability; non-homothetic preferences
JEL Codes: D11; D40; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price (D41) | demand (R22) |
| income (E25) | demand (R22) |
| price aggregator (P22) | demand (R22) |
| Slutsky substitution matrix is symmetric and negative semi-definite (C20) | integrability of demand (D10) |
| demand is monotonically decreasing in price (D41) | demand can be derived from utility function (D11) |
| common price elasticities across goods (D11) | demand shifters increase (J20) |
| conditions imposed (C62) | resulting demand patterns (C69) |