Weak Separability in Applied Welfare Analysis
AbstractThe focus of this paper is the impact on welfare measurement of a common assumption in applied demand analysis, weak separability. A standard empirical practice is to estimate conditional demand models for a set of goods which are assumed to be weakly separable from all other goods with expenditure as a right-hand-side variable, tacitly assuming that expenditure is predetermined (Alston and Chalfant 1987, 1991; Alston, Carter, Green, and Pick; Blackorby, Boyce, and Russell; Blisard and Blaylock; Brown and Heien; Cashin; Choi and Sosin; Clements and E. Selvanathan; Clements and S. Selvana-than; Deaton 1975; Goddard and Amuah; Gould, Cox, and Perali 1990, 1991; Heien; Heien and Pompelli 1988, 1989; Murray; Safyurtlu, John-son, and Hassan; Theil 1976, 1980; Van Ko-oten; Yen and Chern). Once estimated, such separable demand models often are used to cal-culate exact welfare measures, or changes in the true cost of living index, of the economic effects on consumers due to changes in the prices of the goods under study (Heien; Heien and Pom-pelli 1989; Van Kooten; Blisard and Blaylock). This practice is shown here to produce biased results. There are two sources of the bias and both can be traced to the inappropriate treatment of expenditure as predetermined. In an empiri-cal application to the U.S. dairy program, a comparison of estimates from an incomplete demand system specification versus a weakly separable specification suggests a negative bias of around 17% of the compensating variation due to eliminating price discrimination in federal milk marketing orders in 1990. Results from a Monte Carlo simulation suggest that the downward bias is closer to 40%. I first present the analysis of weak separability, then the empirical application, and a summary and conclusions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number archive-26.
Length: 6 pages
Date of creation: 1993
Date of revision:
Publication status: published in American Journal of Agricultural Economics, 75:3, 770â€“775.
Contact details of provider:
Postal: Department of Economics, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/eco/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Mazzocchi, Mario & Stefani, Gianluca, 2002. "Consumer Welfare and the Loss Induced by Withheld Information: The Case of BSE in Italy," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24927, European Association of Agricultural Economists.
- LaFrance, Jeffrey T & Pope, Rulon D., 2007.
"Homogeneity and Supply,"
Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series
qt9kw967kf, Department of Agricultural & Resource Economics, UC Berkeley.
- Hayley H. Chouinard & David E. Davis & Jeffrey LaFrance & Jeffrey M. Perloff, 2008.
"Milk Marketing Order Winners and Losers,"
2009-03, School of Economic Sciences, Washington State University.
- Hayley H. Chouinard & David E. Davis & Jeffrey LaFrance & Jeffrey M. Perloff, 2008. "Milk Marketing Order Winners and Losers," Working Papers 2009-03, School of Economic Sciences, Washington State University.
- Chouinard, Hayley H. & Davis, David E. & LaFrance, Jeffrey T. & Perloff, Jeffrey M., 2005. "Milk marketing order winners and losers," CUDARE Working Paper Series 1006, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Chouinard, Hayley H. & Davis, David E. & LaFrance, Jeffrey T. & Perloff, Jeffrey M, 2005. "Milk Marketing Order Winners and Losers," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt82q751hf, Department of Agricultural & Resource Economics, UC Berkeley.
- Chouinard, Hayley H. & Davis, David E. & LaFrance, Jeffrey T. & Perloff, Jeffrey M., 2006. "Milk Marketing Order Winners and Losers," 2006 Annual meeting, July 23-26, Long Beach, CA 21238, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Vardges Hovhannisyan & Brian W. Gould, 2011. "Quantifying the structure of food demand in China: An econometric approach," Agricultural Economics, International Association of Agricultural Economists, vol. 42, pages 1-18, November.
- Hovhannisyan, Vardges & Gould, Brian W., 2010. "Quantifying the Structure of Food Demand in China Using a Generalized Quadratic AIDS Specification," 2010 Annual Meeting, February 6-9, 2010, Orlando, Florida 56422, Southern Agricultural Economics Association.
- Hovhannisyan, Vardges & Stiegert, Kyle W. & Bozic, Marin, 2013. "On Endogeneity Of Retail Market Power In An Equilibrium Analysis: A Control Function Approach," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149830, Agricultural and Applied Economics Association.
- 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.
- Bockstael, Nancy E. & Freeman III, A. Myrick, 2006. "Welfare Theory and Valuation," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 12, pages 517-570 Elsevier.
- Tirtha Pratim Dhar & Jean-Paul Chavas & Brian W. Gould, 2002.
"An Empirical Assessment of Endogeneity Issues In Demand Analysis for Differentiated Products,"
Food Marketing Policy Center Research Reports
066, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
- Dhar, Tirtha Pratim & Chavas, Jean-Paul & Gould, Brian W., 2002. "An Empirical Assessment of Endogeneity Issues In Demand Analysis for Differentiated Products," Research Reports 25227, University of Connecticut, Food Marketing Policy Center.
- Njonou, Rabelais Yankam & Frahan, Bruno Henry de & Surry, Yves R., 2002. "Testing Separability for Common Wheat Qualities in French Import Demand Market Using Aids and Rotterdam Demand Models," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24921, European Association of Agricultural Economists.
- Teisl, Mario F. & Roe, Brian & Hicks, Robert L., 2002. "Can Eco-Labels Tune a Market? Evidence from Dolphin-Safe Labeling," Journal of Environmental Economics and Management, Elsevier, vol. 43(3), pages 339-359, May.
- repec:ags:usao13:148045 is not listed on IDEAS
- Lichtenberg, Erik & Strand, Ivar E., Jr., 2000. "Joint Adoption Of Multiple Technologies: A Dual, Latent Demand Approach," Working Papers 28566, University of Maryland, Department of Agricultural and Resource Economics.
- Hovhannisyan, Vardges & Bozic, Marin, 2013. "On Price Endogeneity in the Analysis of Food Demand in China," Staff Papers 159771, University of Minnesota, Department of Applied Economics.
- Mario F. Teisl & Nancy E. Bockstael & Alan Levy, 2001. "Measuring the Welfare Effects of Nutrition Information," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 133-149.
- Ming-Feng Hsieh & Paul D. Mitchell & Kyle W. Stiegert, 2009. "Potato demand in an increasingly organic marketplace," Agribusiness, John Wiley & Sons, Ltd., vol. 25(3), pages 369-394.
- Cunha-e-Sa, Maria A. & Ducla-Soares, Maria M., 1999. "Specification Tests for Mixed Demand Systems with an Emphasis on Combining Contingent Valuation and Revealed Data," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 215-233, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Angus).
If references are entirely missing, you can add them using this form.