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Compensated Variation in Random Utility Models

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Abstract

In this paper we introduce the notion of random expenditure function and derive the distribution of the expenditure function and corresponding compensated choice probabilities in the general case when the (random) utilities are nonlinear in income. We also derive formulae for expenditure and choice under price (policy) changes conditional on the initial utility level. This is of particular interest for welfare measurement because it enables the researcher to analyze the distribution of Compensating variation.

Suggested Citation

  • John K. Dagsvik, 2001. "Compensated Variation in Random Utility Models," Discussion Papers 299, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:299
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    File URL: https://www.ssb.no/a/publikasjoner/pdf/DP/dp299.pdf
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    References listed on IDEAS

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    1. P O Lindberg & E A Eriksson & L-G Mattsson, 1995. "Invariance of Achieved Utility in Random Utility Models," Environment and Planning A, , vol. 27(1), pages 121-142, January.
    2. Joseph A. Herriges & Catherine L. Kling, 1999. "Nonlinear Income Effects in Random Utility Models," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 62-72, February.
    3. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
    4. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-659, December.
    5. Daniel McFadden, 1996. "Computing Willingness-to-Pay in Random Utility Models," Working Papers _011, University of California at Berkeley, Econometrics Laboratory Software Archive.
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    Cited by:

    1. Anders Karlström & Mårten Palme & Ingemar Svensson, 2011. "Assessing the welfare change from a pension reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(6), pages 634-657, December.
    2. Richard Batley, 2008. "On Ordinal Utility, Cardinal Utility and Random Utility," Theory and Decision, Springer, vol. 64(1), pages 37-63, February.

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    More about this item

    Keywords

    Random expenditure function; Compensated choice probabilities; Compensating variation.;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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