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Measuring welfare effects in models with random coefficients

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  • Meijer, E.
  • Rouwendal, J.

    (Groningen University)

Abstract

In economic research, it is often important to express the marginal value of a variable in monetary terms. This marginal monetary value is the ratio of two partial derivatives of the conditional indirect utility function, which reduces to the ratio of two coefficients if the utility function is linear. Based on the overwhelming evidence of taste differences among people, random coefficient models have become increasingly more popular in recent years. In random coefficient models, the marginal monetary value is the ratio of two random coefficients and is thus random itself. In this paper, we study the distribution of this ratio and particularly the consequences of different distributional assumptions about the coefficients. It is shown both analytically and empirically that important characteristics of the distribution of the marginal monetary value may be sensitive to the distributional assumptions about the random coefficients. The median, however, is much less sensitive than the mean. The authors would like to thank Ton Steerneman for stimulating discussions and helpful comments.

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Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 00F25.

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Date of creation: 2000
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Handle: RePEc:dgr:rugsom:00f25

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  1. Gallant, A.R. & Tauchen, G., 1988. "Seminonparametric Estimation Of Conditionally Constrained Heterogeneous Processes: Asset Pricing Applications," Papers, Chicago - Graduate School of Business 88-59, Chicago - Graduate School of Business.
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  7. Meijer, E. & Rouwendal, J., 2000. "Measuring welfare effects in models with random coefficients," Research Report, University of Groningen, Research Institute SOM (Systems, Organisations and Management) 00F25, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  8. Hogg, Robert V. & Klugman, Stuart A., 1983. "On the estimation of long tailed skewed distributions with actuarial applications," Journal of Econometrics, Elsevier, Elsevier, vol. 23(1), pages 91-102, September.
  9. Spanos,Aris, 1986. "Statistical Foundations of Econometric Modelling," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521269124.
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  13. Rinus Haaijer & Michel Wedel & Marco Vriens & Tom Wansbeek, 1998. "Utility Covariances and Context Effects in Conjoint MNP Models," Marketing Science, INFORMS, INFORMS, vol. 17(3), pages 236-252.
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