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Incomplete Demand Systems, Corner Solutions, and Welfare Measurement

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  • von Haefen, Roger H.

Abstract

This paper demonstrates how corner solutions raise difficulties for the specification, estimation, and use of incomplete demand systems for welfare measurement with disaggregate consumption data, as is common in the outdoor recreation literature. A simple analytical model of consumer behavior is used to elucidate the potential biases for welfare measurement arising from modeling the demand for M goods as a function of M + N prices (N > 1) and income when individuals do not consume all goods in strictly positive quantities. Results from a Monte Carlo experiment suggest that these biases can be substantial for large-scale policy shocks when prices are highly correlated.

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File URL: http://purl.umn.edu/59327
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Bibliographic Info

Article provided by Northeastern Agricultural and Resource Economics Association in its journal Agricultural and Resource Economics Review.

Volume (Year): 39 (2010)
Issue (Month): 1 (February)
Pages:

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Handle: RePEc:ags:arerjl:59327

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Web page: http://www.narea.org/
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Related research

Keywords: demand systems; welfare analysis; corner solutions; microeconometrics; Environmental Economics and Policy;

References

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  1. von Haefen, Roger H., 2007. "Empirical strategies for incorporating weak complementarity into consumer demand models," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 15-31, July.
  2. Daniel J. Phaneuf & Catherine L. Kling & Joseph A. Herriges, 1998. "Estimation and Welfare Calculations in a Generalized Corner Solution Model with an Application to Recreation Demand," Center for Agricultural and Rural Development (CARD) Publications 99-wp207, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. von Haefen R.H. & Phaneuf D.J. & Parsons G.R., 2004. "Estimation and Welfare Analysis With Large Demand Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 194-205, April.
  4. Epstein, Larry G, 1982. "Integrability of Incomplete Systems of Demand Functions," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 411-25, July.
  5. Phaneuf, Daniel J. & Kling, Catherine L. & Herriges, Joseph A., 1998. "Valuing Water Quality Improvements Using Revealed Preference Methods When Corner Solutions Are Present," Staff General Research Papers 1377, Iowa State University, Department of Economics.
  6. Kling, Catherine L., 1989. "Note on the Welfare Effects of Omitting Substitute Prices and Qualities from Travel Cost Models (A)," Staff General Research Papers 1593, Iowa State University, Department of Economics.
  7. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
  8. Jeffrey T. LaFrance & W. Michael Hanemann, 1989. "The Dual Structure of Incomplete Demand Systems," Development Research Unit Working Paper Series archive-21, Monash University, Department of Economics.
  9. V. Kerry Smith, 1993. "Welfare Effects, Omitted Variables, and the Extent of the Market," Land Economics, University of Wisconsin Press, vol. 69(2), pages 121-131.
  10. Phaneuf, Daniel J. & Carbone, Jared C. & Herriges, Joseph A., 2008. "Non-Price Equilibria for Non-Marketed Goods," Staff General Research Papers 12996, Iowa State University, Department of Economics.
  11. von Haefen, Roger H. & Phaneuf, Daniel J., 2003. "Estimating preferences for outdoor recreation:: a comparison of continuous and count data demand system frameworks," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 612-630, May.
  12. Ozuna, Teofilo, Jr & Gomez, Irma Adriana, 1994. "Estimating a System of Recreation Demand Functions Using a Seemingly Unrelated Poisson Regression Approach," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 356-60, May.
  13. Lee, Lung-Fei & Pitt, Mark M, 1986. "Microeconometric Demand Systems with Binding Nonnegativity Constraints: The Dual Approach," Econometrica, Econometric Society, vol. 54(5), pages 1237-42, September.
  14. Gurmu, Shiferaw & Trivedi, Pravin K, 1996. "Excess Zeros in Count Models for Recreational Trips," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 469-77, October.
  15. Phaneuf, Daniel J., 1999. "A Dual Approach to Modeling Corner Solutions in Recreation Demand," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 85-105, January.
  16. John G. Hof & David A. King, 1982. "On the Necessity of Simultaneous Recreation Demand Equation Estimation," Land Economics, University of Wisconsin Press, vol. 58(4), pages 547-552.
  17. Eom, Young-Sook & Larson, Douglas M., 2006. "Improving environmental valuation estimates through consistent use of revealed and stated preference information," Journal of Environmental Economics and Management, Elsevier, vol. 52(1), pages 501-516, July.
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Cited by:
  1. Castro, Marisol & Bhat, Chandra R. & Pendyala, Ram M. & Jara-Díaz, Sergio R., 2012. "Accommodating multiple constraints in the multiple discrete–continuous extreme value (MDCEV) choice model," Transportation Research Part B: Methodological, Elsevier, vol. 46(6), pages 729-743.

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