SUMMARY

Almost Ideal Demand System

by Angus Deaton and John Muellbauer
The Almost Ideal Demand System (AIDS) joins the advantages of two demand models:
Rotterdam model and translog model. Budget shares of the various commodities are linearly
related to the log of real total expenditure and the log of relative prices, as shown in the following
equation:

= + log( ) + log

is the portion of the budget assigned to the good i

is the price of good k
X is the nominal income
P is nominal income deflator
, , parameters that will be estimated
The equation above models the influences on demand of current prices and current total
expenditure. Additionally, the authors state that AIDS, with its simple structure and coherence
with theory, offers a platform to develop other influences on demand, such as stock effects, errors
in price perceptions, etc.
The aim of the AIDS is to analyze in a simple way most of the properties usually desirable in a
conventional demand system, which is in certain way incomplete as they pay insufficient attention
to the dynamic aspects of consumer behavior. With this new system, based in postwar British data,
they prove that it is inconsistent to rely in a static budget constraint as the conventional models of
demand functions suggest.
The advantages in AIDS, derived from the union of the Rotterdam model and translog model, are:
*gives an arbitrary first-order approximation to any demand system
*satisfies the axioms of choice exactly
*aggregates perfectly over consumers without invoking parallel linear Engel curves, all
agents have identic homothetic preferences (marginal changes are the same for all agents)
* has a functional form which is consistent with known household-budget data (consistent
with disposable statistic data)
*is simple to estimate, largely avoiding the need for non-linear estimation
*can be used to test the restrictions of homogeneity and symmetry through linear
restrictions on fixed parameters
Full text: https://www.princeton.edu/~deaton/downloads/An_Almost_Ideal_Demand_System.pdf

SUMMARY

On the behavior of commodity prices

By Angus Deaton and Guy Laroque
Analyzing commodity prices is essential for less developed countries, because most of them
depend on commodities which have extremely volatile prices. The authors explain the behavior of
commodity prices based on the theory of competitive storage. They focus on the role that storage
plays in having or not inventories in plentiful and scarce times, and its effect on the behavior of
price. Their approach follows the supply and demand tradition adding the behavior of speculators
who hold inventories of commodities in expectation of making profits. Therefore their model has
two categories of agents: the producer-consumer (their demand depend only on current price) and
inventory speculators (carry the commodity from one period to another).
In order to carry on this model, they make the following assumptions:
Random harvest is independent and identically distributed (i.i.d) over time, and do not
respond to current or expected future prices.
Neither consumers nor speculators have advance information about harvests, and know
only the amount on hand immediately after the harvest.
There is only one market each season, held immediately after the harvest, in which a price
is set for that season.
It is impossible to carry forward negative inventories (e.g., crops cannot be consumed
before they are grown). Therefore, there is a non-negativity constraint.
The different possibilities of commodity prices behavior, stated in this paper, are:
1. When price is greater than the equilibrium price, there are zero inventories as producers
want to sell it all. But at the same time this makes the prices on next period more volatile,
since there are fewer inventories on hand before the next periods harvest.
2. If price is lower than equilibrium price, there is a certain amount of inventories but, in
finite time, the positive changes on depreciation rate make the inventories fall to zero
which leads to an increase in price levels as in statement 1.
3. In the case of a negative depreciation rate (i.e., productive inventories), the inventories
start to increase significantly as spectators believe they will have more profits in the future,
causing the price to decrease tending to zero.

Full text:
https://www.princeton.edu/rpds/papers/Deaton_Laroque_On_the_Behavior_of_Commodity_P
rices_RES1992.pdf

SUMMARY

High income improves evaluation of life but not emotional well-being

By Daniel Kahneman and Angus Deaton
The central question on this paper is if money buys happiness. The authors consider the subjective
well-being in two perspectives: emotional well-being (i.e., emotional quality of and induvial every
day experience) and life evaluation (i.e., peoples thoughts about their life when they think about
it). They measure emotional well-being with questions about emotional experiences yesterday and
is correlated with health, caregiving, loneliness and smoking. Life evaluation is measured by Catrils
self-anchoring scale and is correlated with income and education.
They conclude that more money not necessarily buys happiness, but lack of money is directly
associated with an emotional pain. They prove that if income increases there is an increase in
satisfaction (life evaluation) but not in happiness (emotional well-being). On the other hand, if
income decreases there is a decrease in life evaluation and emotional well-being. They also found
out that poverty exacerbates the pain of some lifes misfortunes (e.g., asthma, divorce, being alone,
etc.) Furthermore, the ability of savor small pleasure decreases as income increases. Therefore
emotional well-being is not only determined by a level of income but by other factors of life
circumstances that evoke positive and negative emotions such as spending time with others and
caring for a sick relative.
The analysis carried out in this paper could be relevant for making policies related to human
welfare. But authors disclaim this by stating that life evaluation or emotional well-being may not be
appropriate for those aims.

Full text:
http://www.princeton.edu/~deaton/downloads/deaton_kahneman_high_income_improves_eval
uation_August2010.pdf