Problems in estimating non-linear Engel parameters in the absence of appropriate grouped means and average elasticity of variable elasticity Engel functions

Abstract

Household Expenditure Survey (HES) data are widely reported in grouped form for a number of reasons. Only within-group arithmetic means (AMs) of the household expenditures on various consumption items, total expenditure, income . and other variables are reported in the tabular form. However, the use of such within-group AMs introduces biases when the parameters of various commonly used non-linear Engel functions are estimated by the Aitken's generalized least squares (GLS) method. This is because the within-group geometric means (GMs)/harmonic means (HMs) are needed in order to estimate unbiased parameters of those non-linear Engel functions. Kakwani (1977) estimated the within-group GMs/HMs from the Kakwani-Podder (1976) Lorenz curve for Indonesian data. We have extended his method to estimate within-group GMs/HMs to a set of variables, based on a general type of concentration curve. It is shown that our estimated within-group GMs/HMs based on concentration curves are not entirely suitable for the Australian HES data. However, these GMs/HMs are then used to estimate Engel parameters for various non-linear Engel functions and it is seen that these elasticities are different for some items of certain non-linear Engel functions than those when the reported within-group AMs are used as proxies for within-group GMs/HMs in order to estimate those non-linear Engel functions. The concept of the average elasticity of a variable elasticity Engel function is discussed and computed for various Australian household consumption items. It is empirically demonstrated that the average elasticities are more meaningful than the traditional elasticity estimates computed at some representative values for certain functions.