Exploring the effects of aggregation error in the estimation of consumer demand elasticities

Errors introduced by using aggregate data in estimating a consumer demand model have long been a concern. We study the effects of such errors on elasticity estimates derived from AIDS and QUAIDS models. Based on a survey of published articles, a generic parameterization of the income distribution, and the range of Gini coefficients reported for 28 OECD countries, we generate and analyze a large number of “observations” on the differences between elasticities calculated at the aggregate level and those calculated at the micro level. We suggest a procedure for evaluating the likely range of aggregation error when a model is estimated with aggregate data.

Research highlights► Calculates range of aggregation error for elasticities estimated with aggregate data. ► These errors depend on income distribution parameters, in turn, functions of Gini values. ► With elasticities from literature, computes aggregation errors for range of Gini values. ► On average errors are small, even for large Gini values; but large for some parameters. ► Provides simple method for computing aggregation errors for model with aggregate data.