Regularity Conditions in Flexible Functional Forms: A Case Study of Residential Energy Demand in Iran

This paper focuses on the residential sector demand for electricity, natural gas and petroleum products (Kerosene, gas oil and LPG) in Iran in the context of a popular locally flexible functional forms - “the almost ideal demand system (AIDS)”. We pay explicit attention to the theoretical regularity conditions of positivity, monotonicity, and curvature. We treat the curvature property as a maintained hypothesis and provide a comparison in terms of model's ability in estimation and in terms of violations of the theoretical regularity conditions. Finally, We provide a policy perspective, using annually data set from 1971 to 2005 (a total of 35 observations) and parameter estimates and a full set of elasticities (price, income and Allen & Morishima elasticities) that are consistent with full regularity.