Functional forms of Engel curves: An application to the Italian Family Expenditure Survey
Most demand studies estimate Engel curves or demand systems without testing for the shape of the Engel function. However, Engel curves inconsistent with the data could lead to biased results. This study evaluates the shape of two systems of Engel curves including food and non-food expenditure categories for Italy. The model nests most of the Engel curves underlying demand systems using a Box-Cox approach. The results indicate that for a system of food commodities simple functional forms can be used (e.g. PIGLOG). However, when the focus is on non-food expenditures the requirement is for curvilinear expenditure share Engel curves. Comparisons with the estimated demand systems for Italy show that demand models are often chosen improperly. The choice of the Engel model influences the behavior of expenditure elasticities at different levels of total expenditure. However, it has only a minor influence on the evaluation of demographic effects.