Errors of aggregation and errors of specification in a consumer demand model: a theoretical note
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Consumer demand models based on the concept of a representative or
average consumer suffer from aggregation error. Misspecification of
the underlying micro utility-maximizing model, which is virtually
inevitable, also results in error. This note provides a theoretical
investigation of the relationship between the two types of error.
Misspecified expenditure support functions for demand systems at the
micro level induce the same misspecified structure in the
corresponding expenditure functions at the macro level, and the errors
at the two levels are shown to be of similar order.
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