The Impact Of The Before-After Error Term Correlation On Welfare Measurement In Logit
AbstractWe consider random utility models with independent and identical type I extreme value distribution of the error terms. To compute the expectation of the compensating variation it is necessary to consider the correlation of the error terms between the state before the price and quality change and the state after. We investigate the impact of the before-after correlation of the error terms on the expectation of the compensating variation. We consider each error term to be correlated between the before state and the after state independently and identically across alternatives. We prove the theoretical property that in the case without income effect the logsum formula holds for any assumption on the before-after correlation. We use numerical evidence to show that in the case with income effect the variability of the expectation of the compensating variation with the assumption on the before-after correlation increases with the size of the income effect.
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Bibliographic InfoPaper provided by CREI Università degli Studi Roma Tre in its series Working Papers with number 0412.
Length: 15 pages
Date of creation: 2012
Date of revision: 2012
logit; compensating variation; before-after correlation; income effect;
Find related papers by JEL classification:
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- D60 - Microeconomics - - Welfare Economics - - - General
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