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Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints

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Author Info
Aaron Strong
V. Kerry Smith
Abstract

This paper has two objectives. First, we identify a problem with the ability of the discrete-continuous choice (DCC) framework and conditional demand functions to fully describe consumer preferences in the presence of kinked budget constraints. Second, we propose and illustrate an alternative, preference based, method for estimating consumer responses to price changes under these conditions. Our preference based approach yields price elasticities on the order of 0.4 and a "utilities expenditure" elasticity of near unity. This research highlights the possibility that households may be more sensitive to price schedules than previously thought. It is recognizes commitments to commodities such as pools or outdoor landscaping influence how water consumption responds to price changes as part of the long run adjustments.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14304.

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Date of creation: Sep 2008
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Handle: RePEc:nbr:nberwo:14304

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Find related papers by JEL classification:
H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply (the Commons)

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  1. von Haefen, Roger H., 2002. "A Complete Characterization Of The Linear, Log-Linear, And Semi-Log Incomplete Demand System Models," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(02), December. [Downloadable!]
  2. Hausman, Jerry A., 1980. "The effect of wages, taxes, and fixed costs on women's labor force participation," Journal of Public Economics, Elsevier, vol. 14(2), pages 161-194, October. [Downloadable!] (restricted)
  3. Sudip Chattopadhyay, 1999. "Estimating the Demand for Air Quality: New Evidence Based on the Chicago Housing Market," Land Economics, University of Wisconsin Press, vol. 75(1), pages 22-38. [Downloadable!] (restricted)
  4. Erin T. Mansur & Sheila M. Olmstead, 2007. "The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations," NBER Working Papers 13513, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. James N. Brown & Harvey S. Rosen, 1982. "On the Estimation of Structural Hedonic Price Models," NBER Technical Working Papers 0018, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Sheila Olmstead & W. Michael Hanemann & Robert N. Stavins, 2007. "Water Demand Under Alternative Price Structures," NBER Working Papers 13573, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Edlefsen, Lee E, 1981. "The Comparative Statics of Hedonic Price Functions and Other Nonlinear Constraints," Econometrica, Econometric Society, vol. 49(6), pages 1501-20, November. [Downloadable!] (restricted)
  8. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 831-877, 05. [Downloadable!] (restricted)
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  9. Ellen Hanak & Ada Chen, 2007. "Wet Growth: Effects Of Water Policies On Land Use In The American West," Journal of Regional Science, Blackwell Publishing, vol. 47(1), pages 85-108. [Downloadable!] (restricted)
    Other versions:
  10. Vartia, Yrjo O, 1983. "Efficient Methods of Measuring Welfare Change and Compensated Income in Terms of Ordinary Demand Functions," Econometrica, Econometric Society, vol. 51(1), pages 79-98, January. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Bockstael, Nancy E & McConnell, Kenneth E, 1983. "Welfare Measurement in the Household Production Framework," American Economic Review, American Economic Association, vol. 73(4), pages 806-14, September. [Downloadable!] (restricted)
  13. Arrufat, Jose Luis & Zabalza, Antonio, 1986. "Female Labor Supply with Taxation, Random Preferences, and Optimization Errors," Econometrica, Econometric Society, vol. 54(1), pages 47-63, January. [Downloadable!] (restricted)
  14. Peter C. Reiss & Matthew W. White, 2006. "Evaluating Welfare with Nonlinear Prices," NBER Working Papers 12370, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Jerry A. Hausman, 1980. "The effect of wages, taxes, and fixed costs on women's labor force participation," NBER Chapters, in: Econometric Studies in Public Finance, pages 161-194 National Bureau of Economic Research, Inc.
  16. Hausman, Jerry A., 1979. "The econometrics of labor supply on convex budget sets," Economics Letters, Elsevier, vol. 3(2), pages 171-174. [Downloadable!] (restricted)
  17. Bullock, David S. & Minot, Nicholas, 2006. "On Measuring the Value of a Nonmarket Good Using Market Data," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25272, International Association of Agricultural Economists. [Downloadable!]
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  18. Epstein, Larry G, 1981. "Generalized Duality and Integrability," Econometrica, Econometric Society, vol. 49(3), pages 655-78, May. [Downloadable!] (restricted)
  19. Mendelsohn, Robert, 1985. "Identifying Structural Equations with Single Market Data," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 525-29, August. [Downloadable!] (restricted)
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