Consumption habits and comparison of the perfomances of two flexible functional forms. An application to Italian consumer demand

Historically, consumer behaviour has always been a subject of great interest for economists. Indeed, the theoretical and empirical approaches to the analysis of consumption phenomenon represent two interrelated, though autonomous, veins of research on a subject, which has undergone substantial conceptual changes over time to reach its present form. This paper provides a comprehensive study of consumer behaviour in Italy over the period 1970-2007. Traditionally, this type of studies gives partial and biased description of household spending habits because based on individual/few groups of commodities. This paper provides a de tailed assessment of the phenomenon by considering simultaneously all the first twelve divisions of the COICOP through two broad levels of analysis. The first is an analytic description of the key patterns of Italian consumption in volume terms, budget shares and relative prices over the period analysed with data from the Italian Institute of National Statistics. The second is an empirical evaluation of the phenomenon through the implementation of two classic functional forms. Specifically they are the Indirect Translog System as defined by Christensen, Jorgenson and Lau (1975), and the Generalised Leontief model as proposed by Diewert (1974). An economic and econometric comparison of outcomes is also worked out. Results indicate consumption habits, income and relative price differentials as main factors influencing consumer behaviour.