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Compensating Variation and Hicksian Choice Probabilities in Random Utility Models that are Nonlinear in Income

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Author Info
John K. Dagsvik
Anders Karlström

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Abstract

In this paper we discuss Hicksian demand and compensating variation in the context of discrete choice. We first derive Hicksian choice probabilities and the distribution of the (random) expenditure function in the general case when the utilities are nonlinear in income. We subsequently derive exact and simple formulae for the expenditure and choice probabilities under price (policy) changes conditional on the initial utility level. This is of particular interest for welfare measurement because it enables the researcher to compute the distribution of compensating variation in a simple way. We also derive formulae for the joint distribution of expenditure, the choice before and after a policy change has been introduced. Copyright The Review of Economic Studies Limited, 2005.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/0034-6527.00324
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 72 (2005)
Issue (Month): 1 (01)
Pages: 57-76
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Handle: RePEc:bla:restud:v:72:y:2005:i:1:p:57-76

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  1. John K. Dagsvik, Marilena Locatelli and Steinar Strøm, 2006. "Simulating labor supply behavior when workers have preferences for job opportunities and face nonlinear budget constraints," Discussion Papers 488, Research Department of Statistics Norway. [Downloadable!]
    Other versions:
  2. Anna Brink & Katarina Nordblom & Roger Wahlberg, 2007. "Maximum Fee vs. Child Benefit: A Welfare Analysis of Swedish Child-Care Fee Reform," IZA Discussion Papers 2748, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. John K. Dagsvik and Zhiyang Jia, 2006. "Labor Supply as a Choice among Latent Job Opportunities. A Practical Empirical Approach," Discussion Papers 481, Research Department of Statistics Norway. [Downloadable!]
  4. Dagsvik John. K. & Locatelli Marilena & Strom Steinar, 2007. "Evaluation of tax reforms when workers have preferences over job attributes and face latent choice restrictions," Department of Economics Working Papers 200706, University of Turin. [Downloadable!]
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  5. André De Palma & Karim Kilani, 2009. "Transition choice probabilities and welfare in ARUM's," Working Papers hal-00417493_v1, HAL. [Downloadable!]
  6. Di Tommaso Maria Laura & Strom Steinar & Saether Erik Magnus, 2007. "Nurses wanted. Is the job too harsh or is the wage too low?," Department of Economics Working Papers 200704, University of Turin. [Downloadable!]
    Other versions:
  7. Marilena Locatelli & Steinar Strøm, 2006. "Computation of the compensating variation within a random utility model using GAUSS software," CHILD Working Papers wp02_06, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY. [Downloadable!]
  8. Olivier Bargain, 2004. "On modeling household labor supply with taxation," DELTA Working Papers 2004-14, DELTA (Ecole normale supérieure). [Downloadable!]
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  9. John Creedy & Nicolas Hérault & Guyonne Kalb, 2007. "Comparing Welfare Change Measures with Income Change Measures in Behavioural Policy Simulations," Melbourne Institute Working Paper Series wp2007n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
    Other versions:
  10. Richard Batley, 2008. "On Ordinal Utility, Cardinal Utility and Random Utility," Theory and Decision, Springer, vol. 64(1), pages 37-63, February. [Downloadable!] (restricted)
  11. Anna Brink & Katarina Nordblom & Roger Wahlberg, 2007. "Maximum fee versus child benefit: a welfare analysis of Swedish child-care fee reform," International Tax and Public Finance, Springer, vol. 14(4), pages 457-480, August. [Downloadable!] (restricted)
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