2
$\begingroup$

I've been reviewing my microeconomics notes and have found a point that I still don't quite understand. this being Gorman Polar Form

Gorman form of the indirect utility function is as defined by Varian is:

$$v(p,m)=a_i(p)+b(p)m$$

where $a_i(p)$ differs from each consumer and $b(p)m$ is the same for every consumer.

How does one estimate $b(p)m$?

$\endgroup$
2
  • $\begingroup$ Do you want to know what people do in empirical work? The space of such functions is infinite dimensional so you need specific functional forms or an infinite amount of data. $\endgroup$ – Michael Greinecker Jun 15 '18 at 12:34
  • $\begingroup$ @MichaelGreinecker I'm not sure. I find it rather odd that $m$ does not actually help determine $b(\dot)$ but is actually just "slapped on" next to it. My current knowledge of econometric methods suspects that this can be done by running a regression of a prices and prices interacting with income on a utility index but that's just a guess. $\endgroup$ – EconJohn Jun 15 '18 at 16:47
1
$\begingroup$

After doing some reading on the topic, it appears we would estimate this equation as we would with any other demand estimation.

the reason why the term $b(p)m$ is written this way is due to the assumption of homothetic preferences (or homogeneous of degree 1, this dosen't matter in demand analysis). Since Gorman polar form is a homothetic form this implies that:

$$v(p,m)=a_i(p)+b(p)m \equiv a_i(p)+b(p,m)$$

more specifically $$b(p,m) \Rightarrow b(p)m$$

if preferences are homothetic or homogeneous of degree 1.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.