Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems
Centre for Economic Policy Research Discussion Paper Series. ISSN 0265-8003. Centre for Economic Policy Research, 2017. No. DP12210.
We characterize three classes of demand systems, all of which are defined non-parametrically: homothetic demand systems with a single aggregator (HSA), those with direct implicit additivity (HDIA), and those with indirect implicit additivity (HIIA). In HSA, all the cross-price effects are captured by one price aggregator, while in HDIA and in HIIA, they are captured by two price aggregators. Each of these three classes contains CES as a special case. Yet, they are pairwise disjoint with the sole exception of CES. Thus, these classes of homothetic demand systems offer us three alternative ways of departing from CES.