Sunday, December 14, 2014

The Rotterdam Model

Ken Clements (U. Western Australia) has sent me a copy of his paper, co-authored with Grace Gao this month, "The Rotterdam Demand Model Half a Century On". 

How appropriate it is to see this important landmark in econometrics honoured in this way. And how fitting that this paper is written by two Australian econometricians, given the enormous contributions to empirical demand analysis that have come from that group of researchers - including Ken and his many students - over the years. (But more on this another time.)

Any student who wants to see applied econometrics at its best can do no better than look at the rich empirical literature on consumer demand. That literature will take you beyond the "toy" models that you meet in your micro. courses, to really serious ones: the Linear Expenditure System, the Rotterdam Model, the Almost Ideal Demand System, and others. Where better to see the marriage of sound economic modelling, interesting data, and innovative statistical methods? In short - "econometrics".

Back to Ken and Grace's paper, though. Here's the abstract:

"Half a century ago, Barten (1964) and Theil (1965) formulated what is now known as the Rotterdam model. A path-breaking innovation, this system of demand equations allowed for the first time rigorous testing of the theory of the utility-maximising consumer. This has led to a vibrant, on-going strand of research on the theoretical underpinnings of the model, extensions and numerous applications. But perhaps due to its European heritage and unorthodox derivation, there is still misunderstanding and a tendency for the Rotterdam model to be regarded with reservations and/or uncertainties (if not mistrust). This paper marks the golden jubilee of the model by clarifying its economic foundations, highlighting its strengths and weaknesses, elucidating its links with other models of consumer demand, and dealing with some recent developments that have their roots in Barten and Theil’s pioneering research of the 1960s." 
I hop that you'll take the time to read this excellent paper.

A final comment: I included the Barten and Theil papers in my post, Vintage Years in Econometrics - the 1960's. Both papers richly deserve that recognition.


References

Barten, A. P., 1964. Consumer demand functions under conditions of almost additive preferences. Econometrica, 32, 1-38.

Theil, H., 1965. The information approach to demand analysis. Econometrica, 33, 67-87.


© 2014, David E. Giles

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