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Identification and Estimation of Engel Curves with Endogenous and Unobserved Expenditures

Authors

  • Erich Battistin,

    1. Department of Statistics, University of Padova, Italy
    2. Research Institute for the Evaluation of Public Policies (IRVAPP), Trento, Italy
    3. Institute for the study of Labor (IZA), Bonn, Germany
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  • Michele De Nadai

    Corresponding author
    1. Department of Statistics, University of Padova, Italy
    • Correspondence to: Michele De Nadai, Department of Statistics, University of Padova, Italy.

      E-mail: denadai@stat.unipd.it

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Summary

When dealing with the estimation of Engel curves, measurement errors in expenditure data and simultaneity are likely sources of endogeneity. In this paper we study identification of the parameters that characterize an Engel curve in the presence of both. We consider specifications where budget shares are polynomials in the logarithm of total expenditure, which is the case frequently encountered in empirical applications. We propose an estimation procedure which is an extension of that in Lewbel (1996) and exploits a control function assumption to correct for the endogeneity of the true unobserved total expenditure. Copyright © 2013 John Wiley & Sons, Ltd.

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