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Elasticities under multi-stage budgeting

Zeelenberg, Kees (1988): Elasticities under multi-stage budgeting.

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Under multi-stage budgeting, the consumer allocates his income first to groups of goods (the highest stage), then for each group the expenditure to subgroups (the next-highest stage), etc, until finally the expenditure on the goods has been allocated (the lowest stage). This paper derives expressions that relate the price and income substitution and the elasticities of substitution of the demand for goods to the corresponding elasticities of the demand for groups at each stage. In particular, it is shown that the elasticity of substitution between two goods is equal to a weighted sum of the elasticities of substitution at the stages, modified for within-stage income effects.

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