A new method to estimate the income elasticity of marginal utility of income in the absence of price data

The income elasticity of marginal utility of income, ω , and price elasticities are key parameters in both micro- and macroeconomic policy analyses, including computable general equilibrium modeling, cost-benefit analysis, and public economics decision-making. Typically, the value of is derived by estimating demand systems using price, quantity, and income data. Price elasticities are then calculated based on the estimated value of . However, most household expenditure surveys do not separately collect price data, making it impossible to estimate and price elasticities directly. This limitation creates significant challenges when using household survey data for consumer demand analysis. A recent study by Clements et al. (2022) used Australian household expenditure survey data to estimate price elasticities in the absence of price data by adopting an approximate value, ω = - 2, which is frequently cited in the consumer demand literature when price data are available. Building upon this, the present paper introduces a new method for estimating ω and, in turn, price elasticities and demonstrate its application using Sri Lanka’s Household Income and Expenditure Survey data. The estimated values are then used to test the well-known Frisch (1959) conjecture and Pigou’s (1910) law. Both are strongly supported by the data. • A new method of estimating income flexibility (ϕ) in the absence of price data is provided • The proposed method is applied to Sri Lankan household survey data • Income level-specific estimates of income flexibility improve policy development • Empirical validity of Frisch conjecture and Pigou’s law investigated and found strong support • ω (=1/ϕ) decreases in absolute value as we move from poorer to richer households