Logistic Transformation of the Budget Share in Engel Curves and Demand Functions

Models relating the budget share of a commodity to (the logarithms) of income and prices are popular in the analysis of household budget survey data and of time series data on commodity expenditures. This paper shows that both the behavioural economic properties and the econometric, or statistical, properties of the models can be substantially improved by first employing a logistic transformation of the budget share. The paper mainly concerns estimation in a single equation context, but related issues of demand systems and utility theory are examined. The methodology is illustrated by analysis of some Irish household budget survey data.