A Linear Expenditure System Allowing for Direct Substitutability of Various Foodstuffs

Podkaminer, L. (1981). A Linear Expenditure System Allowing for Direct Substitutability of Various Foodstuffs. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-81-139

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Abstract

It is widely acknowledged that the Linear Expenditure System -- or any system derived on the assumption of additive utility function -- rules out direct substitution effects among the commodities. When applied to the study of the structure of demand for particular foodstuffs, any such demand study violates some of the legitimate intuition about actual substitutability of various food-stuffs: the similarity of nutritional content of any two (or more) otherwise "different" commodities does -- to a great extent -- seem to prejudge their actual substitutability.

The paper presents a modified linear expenditure system, which, having all the advantages of the simple LES at the same time allows for direct substitutability of particular foodstuffs. The theory, related to K. Lancaster's idea of the "new approach to the demand study" appears rather fruitful. The estimates of the parameters of the system for Italy, the Netherlands, West Germany and Great Britain obtained on its basis exhibit a rather unusually high statistical significance. At the same time these estimates seem very much the same for all the four countries studied.

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