Bias in Estimating the Almost Ideal Demand System with the Stone Index Approximation.

This paper shows that the commonly used Stone index approximation can bias the parameter estimates of the almost ideal demand system. The bias mostly affects the price parameters and can be more serious when the budget share equations are estimated with individual household rather than aggregate data. In the absence of strong substitution effects, the price parameter bias can be largely corrected through simple reparameterization. Copyright 1993 by Royal Economic Society.