DP12210 Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems

Author(s): Kiminori Matsuyama, Philip Ushchev
Publication Date: August 2017
Keyword(s): CES, CRS production functions, Demand systems with a single aggregator, direct implicit additivity, gross complements and gross substitutes, homothetic preferences, indirect implicit additivity, translog
JEL(s): D11, D21
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12210

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.