Estimating and testing the Compensated Double-Log Demand Model.” Applied Economics

In spite of the proliferation of ¯exible functional forms for consumer demand systems, the double-log demand model continues to be popular, especially in applied work calling for single-equation models. It is usually estimated in uncompensated form. It can also be estimated in compensated form, by de¯ating the income variable alone using Stone’s price index. The compensated form has the same right-hand side as a single-equation version of the popular linear approximation to the Almost Ideal demand model, facilitating the construction of a test for choosing between the two alternatives. This paper demonstrates these results, develops the speci®cation test, and illustrates its application using US meat consumption data. Simulations suggest that the test is well-behaved with good power in typical applications. In recent years, the academic literature on empirical demand analysis increasingly emphasized the use of ¯exible functional forms to estimate systems of demand equations that are consistent with demand theory. These models hav