Modelling Zeroes in Micro Data Jane M. Fry * , Tim R. L. Fry # , Keith R. McLaren # and Tanya N. Smith # 1 * Centre of Policy Studies # Department of Econometrics and Business Statistics Monash University, Clayton, Victoria 3168 Australia 12 May 1998 Abstract: Although the literature contains a number of suggestions for dealing with problems caused by a preponderance of zero expenditure observations that frequently occur in micro level budget studies, in general, these suggestions seem to be either empirically intractable or theoretically unappealing. In this paper it is argued that a natural theoretical specification can be motivated by duality theory and that the statistical technique of compositional data analysis provides a corresponding complementary stochastic specification. The resulting model is a consistent theoretical and stochastic specification for handling the possibility of a zero demand over a range of expenditures and/or prices. The model is then applied to the 1988/89 Australian Household Expenditure Survey. Keywords: Demand systems, Compositional Data Analysis, stochastic specification, corner solutions, micro level budget studies. J. E. L. Classification: D12, C30. Correspondence to: Jane M. Fry, Centre of Policy Studies, Monash University, Wellington Road, Clayton, Victoria 3168, Australia. 1 Part of this research was funded by an Australian Research Council Grant.