Regularity Conditions in Flexible Functional Forms: A Case Study of Residential Energy Demand in Iran

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Abstract

This paper focuses on the residential sector demand for electricity, natural gas and petroleum products (Kerosene, gas oil and LPG) in Iran in the context of a popular locally flexible functional forms - “the almost ideal demand system (AIDS)”. We pay explicit attention to the theoretical regularity conditions of positivity, monotonicity, and curvature. We treat the curvature property as a maintained hypothesis and provide a comparison in terms of models' ability in estimation and in terms of violations of the theoretical regularity conditions.
Finally, We provide a policy perspective, using annually data set from 1971 to 2005 (a total of 35 observations) and parameter estimates and a full set of elasticities (price, income and Allen & Morishima elasticities) that are consistent with full regularity.
JEL Classification: C3, C51, Q41, Q43

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Journal of Economic Research (Tahghighat- E- Eghtesadi)
Volume 47, Issue 3 - Serial Number 3
January 2013
Pages 145-163

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