Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints
This paper has two objectives. First, we identify a problem with the ability of the discrete-continuous choice (DCC) framework and conditional demand functions to fully describe consumer preferences in the presence of kinked budget constraints. Second, we propose and illustrate an alternative, preference based, method for estimating consumer responses to price changes under these conditions. Our preference based approach yields price elasticities on the order of 0.4 and a "utilities expenditure" elasticity of near unity. This research highlights the possibility that households may be more sensitive to price schedules than previously thought. It is recognizes commitments to commodities such as pools or outdoor landscaping influence how water consumption responds to price changes as part of the long run adjustments.
Partial support for this research was provided by ASU's Decision Center for a Desert City. Thanks are due to Josh Abbott, Rob Williams, Chris Goemans, Jay Shimshack, the participants of the University of Colorado Workshop in Environmental and Resource Economics and two anonymous referees for comments and to Eric Moore and Jonathan Eyer for excellent research assistance and to Michael Tschudi for developing the GIS linkages between census and PAMA water provider service areas. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Aaron Strong & V. Kerry Smith, 2010. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," Land Economics, University of Wisconsin Press, vol. 86(1), pages 173-190. citation courtesy of