The Econometrics of Piecewise-Linear Budget Constraints

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Abstract
In this article maximum likelihood techniques for estimating consumer demand functions when budget constraints are piecewise linear are exposited and surveyed. Consumer demand functions are formally derived under such constraints, and it is shown that the functions are themselves nonlinear as a result. The econometric problems in estimating such functions are exposited, and the importance of the stochastic specification is stressed, in particular the specification of both unobserved heterogeneity of preferences and measurement error. Econometric issues in estimation and testing are discussed, and the results of the studies that have been conducted to date are surveyed.