Selecting Correct Functional Form in Consumption Function: Analysis of Energy Demand at Household Level
Author: Faisal Abbas

In the estimation of demand functions for energy resources, parametric econometric models of energy demand are commonly used to predict future energy needs. The functional forms commonly assumed in parametric energy demand models include linear functional forms, log-linear forms, trans-log models and almost ideal demand system. It is frequently debated which is the “best” functional forms to employ in order to accurately represent the underlying relationships between the demand for various energy resources and explanatory variables such as energy prices, income and other demographic variables. The recent interest has been focused on developing proper non nested tests to compare the two demand system, double log model and LA-AIDS model. C-test is used to test the validity of using the two parametric functional forms in models of residential energy demand. Cross-sectional household-level data of the Pakistan Social and Living Standards Measurement (Social & HIES) 2013-14 and Asian Development Bank (ADB) Asia and Pacific 2018 is used. We find that the LA-AIDS model is better than the double log model. Empirical findings suggests that if the population and GDP per capita grows every year than the household per capita demand for energy resources will rise over the next decade by maintaining prices constant. Supervisor:- Dr. Hafsa Hina

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Keywords : C-Test., Double Log Model, ENERGY DEMAND, LA/AIDS
Supervisor: Hafsa Hina

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