SPECIFICATION AND ESTIMATION OF REGULAR INVERSE DEMAND SYSTEMS: A DISTANCE FUNCTION APPROACH

To allow realistic policy simulations in a changing environment, inverse demand systems must remain regular over substantial variations in quantities. The distance function is a convenient vehicle for gener-ating such systems. While its use directly yields Hicksian inverse demand functions, those functions will not usually have an explicit representation in terms of the observable variables. However, this problem need not hinder estimation and can be solved by using a numerical inversion estimation approach. This article develops the formal theory for using distance functions in this context and demonstrates the operational feasibility of the method. Key words: inverse demands, distance functions, numerical inversion estimation, separability. In recent years, there has been increasing inter-est in investigating systems of inverse demand functions in which normalized prices are func-tions of quantities demanded, for example, Kim; Park, Thurman, and Easley on welfare measurement; Huang; Eales and Unnevehr