Demand systems based on regular ratio indirect utility functions

Empirical demand analysis is usually conducted in the context of the perennial trade-off between regularity and flexibility. The class of known globally regular demand systems is quite small and comes at the price of inflexibility. At the other extreme are demand systems such as Translog or the Almost Ideal Demand Systems designated as locally flexible, in that they do not put any prior restrictions on slopes (or elasticities), other than those imposed by the regularity conditions, at the point of approximation. The cost of this flexibility at a point is that these systems usually exhibit only small regions of regularity about the point of approximation. A convenient compromise between these two extremes is the class of “effectively globally regular” demand systems, which preserve regularity in an interesting unbounded region. Lewbel extended Gorman’s definition of rank to non-aggregable systems, and also showed that rank is equivalent to the minimum number of price indices in the indirect utility function. The purpose of this paper is to introduce a new demand system that is effectively globally regular, potentially locally flexible, and of potentially arbitrary rank.