An Empirical Test of Methods for Estimating Price Elasticities from Household Survey Data

Unit values, calculated as the ratio of household expenditure on a particular food to the quantity consumed, are often used as proxies for market prices in demand studies based on cross-sectional survey data. Because unit values are likely to give biased estimates of price elasticities, Deaton (1987, 1990) developed procedures for correcting these biases. However, empirical evidence on the bias created by unit values in demand systems is lacking. In this paper we use data collected specifically to carry out comparisons with the results of using market prices. Our findings suggest that unit values, whether used in naive or improved estimation procedures, provide poor approximations to the elasticities calculated with market price data. We provide an example where optimal tax reform is distorted by using price elasticities calculated from unit values. JEL: C81, D12