Modelling zeroes in microdata

Although the literature contains a number of suggestions for dealing with p roblems caused by a preponderance of zero expenditure observations that fre quently occur in micro level budget studies, in general, these suggestions seem to be either empirically intractable or theoretically unappealing. In this paper it is argued that a natural theoretical specification can be mot ivated by duality theory and that the statistical technique of compositiona l data analysis provides a corresponding complementary stochastic specifica tion. The resulting model is a consistent theoretical and stochastic specif ication for handling the possibility of a zero demand over a range of expen ditures and/or prices. The model is then applied to the 1988/89 Australian Household Expenditure Survey.