When does specification or aggregation across consumers matter for economic impact analysis models? An investigation into demand systems

Economic impact analysis simulation models frequently rely on some kind of representation of consumption behavior. However, the sensitivity of such results with respect to the choices of the specification and the level of aggregation across consumers has not yet been thoroughly examined. We exploit a unique dataset to simulate various stereotypical scenarios and investigate the influence of the choice between six demand system specifications and household-level versus national-level models on several outcome measures. We find that both choices have a large influence on simulation results and thus on policies deduced therefrom. Our results point to pragmatic recommendations for various settings.