The demand for road transport in China: imposing theoretical regularity and flexible functional forms selection

TL;DR

This study evaluates demand elasticity for China's road transport using flexible functional forms, emphasizing the importance of imposing microeconomic regularity conditions for accurate estimates.

Contribution

It compares three flexible demand models and identifies the AIDS model as the only one satisfying theoretical regularity, providing more reliable demand estimates.

Findings

Private transportation is a luxury good with elastic demand.

Private and local transportation are gross complements.

Private and intercity transportation are substitutes.

Abstract

Road transport sector is found to be one of the major emitters, and responsible for serious air pollution and huge pubic health losses. One important parameter for determining the consequences of transport demand shocks for the macroeconomy, air pollution and public health is the elasticity of the demand for transport. Most published studies that use flexible functional forms have ignored the theoretical regularity conditions implied by microeconomic theories. Moreover, even a few studies have checked and/or imposed regularity conditions, most of them equate curvature alone with regularity, thus ignoring or minimizing the importance of other regularities. And then, the results appear biased and may in fact be biased. Therefore, we select three of the most widely used flexible functional forms, the Rotterdam model, the Almost Ideal Demand System (AIDS), and the quadratic AIDS (QUAIDS) to investigate the demand for road transport in China using recent annual expenditure data, over a 13 year period from 2002 to 2014, on three expenditure categories in the transportation sector: private transportation, local transportation and intercity transportation. Estimation shows that the AIDS model is the only model that is able to provide theoretically consistent estimates of the residents demand for road transport in China. Our estimates show that the private transportation is a luxury among the transportation goods, and is elastic in price changes relatively. The empirical results imply that the private and the local transportation, the local and intercity transportation are gross complements. And, the private transportation is a substitute for the inter-city transportation, while the intercity transportation is a complement of the private transportation.