Working Paper: CEPR ID: DP18606
Authors: Clement Bohr; Marti Mestieri; Emre Yavuz
Abstract: We provide four novel results for nonhomothetic Constant Elasticity of Substitution preferences (Hanoch, 1975). First, we derive a closed-form representation of the expenditure function of nonhomothetic CES under relatively flexible distributional assumptions of demand and price distribution parameters. Second, we characterize aggregate demand from heterogeneous households in closed-form, assuming that household total expenditures follow an empirically plausible distribution. Third, we leverage these results to study the Euler equation arising from standard intertemporal consumption-saving problems featuring within-period nonhomothetic CES preferences. Finally, we show that nonhomothetic CES expenditure shares arise as the solution of a discrete-choice logit problem.
Keywords: Nonhomothetic CES Preferences; Closed-Form Representation; Demand Aggregation
JEL Codes: E21; E25; D11; D31; C4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Utility derived from consumption (D11) | Total expenditure of households (D12) |
| Distribution of expenditures (H59) | Aggregate consumption patterns (E21) |
| Nonhomothetic CES preferences (D11) | Households' intertemporal choices (D15) |
| Utility maximization behavior (D11) | Consumption choices (D10) |