LINEAR AND QUADRATIC SPLINE MODELS FOR CONSUMER DEMAND-FUNCTIONS

The paper combines flexible functional form techniques, which provide local approximations to indirect preferences with respect to prices and incomes, with spline techniques, which provide global approximations with respect to real income. The main technical problem is that real income or utility is an unobserved variable. Starting with the normalized quadratic expenditure function, linear and quadratic spline models are introduced theoretically and are empirically estimated using Japanese consumer data for four goods for the years 1970-87. The semi-non-parametric literature initiated by Gallant is reviewed, and a limited semi non parametric property is claimed to hold for the spline models presented in the paper.