Two-Stage Utility Maximization and Import Demand Systems Revisited: Limitations and an Alternative

Two-stage utility maximization theory has been widely used in the literature to estimate import demand for agricultural commodities that are often inputs. This article examines the overlooked conceptual and empirical limitations of applying two-stage utility maximization theory to model the demand for imported commodities that are inputs. A discussion is presented about how the underutilized theory of two-stage profit maximization overcomes these limitations. Also discussed are the conditions under which errors resulting from misapplied utility theory may not be severe. An empirical illustration of the two-stage profit maximization procedure is provided.