SFB 303 Discussion Paper No. A - 264
Author: Härdle, Wolfgang, Werner Hildenbrand, and Michael Jerison
Title: Empirical Evidence on the Law of Demand
Abstract: When general equilibrium models are used to make comparative static predictions they cease to be general.
This is necessarily so. Without a specific structure of the demand and supply system one cannot expect any
definite comparative static results. However, in most analyses, conclusions depend upon structure imposed either
by aggregating consumers into a single representative, or by assuming restrictive forms for utility or production
functions. Such analyses therefore deal with special cases. The present paper considers an alternative way of
imposing structure on a general equilibrium model. It considers sufficient conditions for the multimarket version
of the "Law of Demand" in a consumption sector, cf. Hicks (1956). The sufficient conditions are a hybrid,
combining standard theoretical restrictions with restrictions that do not come from a theoretical model. The latter
restrictions can, under certain conditions, be tested and we provide such a test using U.K. expenditure data.
The paper proceeds as follows. In Section 2 we present a model of a large consumption sector. We define the Law of
Demand and the mean income effect matrix and show how a closely related matrix can be estimated using cross
section data. In Section 3 we discuss the latter matrix, estimated using the method of average derivatives. The
estimation procedure is described in the Appendix.
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Creation-Date: November 1989
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