Instrumental variables estimation of large demand systems with an application to fruit and vegetable demand and price index

Abstract This paper derives the asymptotic properties of an iterated three‐stage least squares (I3SLS) estimator and applies it to estimate a Quadratic Almost Ideal Demand (QUAID) system for 47 fruits and vegetables with endogenous prices. We calculate an exact price index from the estimates and compare it with several commonly used price indexes. We find that the superlative Fisher Ideal and Törnqvist indexes approximate our QUAID exact index well, supporting their continued use in cost‐of‐living measurement. We also see considerable variation in the regional cost of acquiring fruits and vegetables.