ACCOUNTING FOR AGGREGATION BIAS IN ALMOST IDEAL DEMAND SYSTEMS

This study revisits the consistent aggregation (over households) prope rty of almost ideal demand system (AIDS) models and presents a method to explicitly account for expenditure aggregation bias when estimating the aggregate AIDS model with time-series data. Ignoring aggregation bias can lead to biased and inconsistent parameter estimates and can c ause aggregate demand functions to be inconsistent with the demand fun ctions at the individual household level. Recognizing the generally li mited information contained in aggregate time-series data for explicit ly modeling aggregation bias, we present a new method of constructing an aggregation bias term that is derived from the proportions of house holds in different income groups. This information is generally availa ble in developed economies. We use this framework to estimate aggregat e meat demand within a complete demand system based on U.S. annual exp enditure data.