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Hicksian Surplus Measures of Individual Welfare Change When There is Price and Income Uncertainty

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Author Info
Charles Blackorby () (Department of Economics, University of Warwick and GREQAM)
David Donaldson () (Department of Economics, University of British Columbia)
John A. Weymark () (Department of Economics, Vanderbilt University)

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Abstract

This article considers measures of individual welfare change for projects that change the state distribution of prices and incomes. For a consumer whose preferences satisfy the expected utility hypothesis, we investigate whether there is an increasing function of the state-contingent compensating variations that is positive valued if and only if a project makes the consumer better off ex ante when income and some or all prices are permitted to vary across states. We show that any such measure of individual welfare change must rank projects by their expected compensating variation. Furthermore, the indirect utility function that the consumer uses to evaluate prices and income in each state and that is used to compute expected utilities must be affine in income with the origin term independent of all prices and the weight on income independent of those prices that are uncertain. These restrictions imply that preferences are homothetic. If all prices are uncertain, these conditions are inconsistent with the homogeneity properties of an indirect utility function and, hence, we obtain an impossibility result.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu06-w18.pdf
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File Function: First version, 2006
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Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0618.

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Date of creation: Aug 2006
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Handle: RePEc:van:wpaper:0618

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Related research
Keywords: Cost-benefit; consumer's surplus; expected compensating variation;

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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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  1. Blackorby, Charles & Donaldson, David, 1986. "Can Risk-Benefit Analysis Provide Consistent Policy Evaluations of Projects Involving Loss of Life?," Economic Journal, Royal Economic Society, vol. 96(383), pages 758-73, September. [Downloadable!] (restricted)
  2. Blackorby, Charles & Donaldson, David & Moloney, David, 1984. "Consumer's Surplus and Welfare Change in a Simple Dynamic Model," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 171-76, January. [Downloadable!] (restricted)
  3. Roberts, Kevin, 1980. "Price-Independent Welfare Prescriptions," Empirical Economics, Springer, vol. 13(3), pages 277-97, June.
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  4. Anderson, James E & Riley, John G, 1976. "International Trade with Fluctuating Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(1), pages 76-97, February. [Downloadable!] (restricted)
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  5. Hammond, Peter J., 1980. "Dual interpersonal comparisons of utility and the welfare economics of income distribution : A corrigendum," Journal of Public Economics, Elsevier, vol. 14(1), pages 105-106, August. [Downloadable!] (restricted)
  6. Blackorby, Charles & Davidson, Russell & Donaldson, David, 1977. "A Homiletic Exposition of the Expected Utility Hypothesis," Economica, London School of Economics and Political Science, vol. 44(176), pages 351-58, November. [Downloadable!] (restricted)
  7. Helms, L. Jay, 1984. "Comparing stochastic price regimes : The limitations of expected surplus measures," Economics Letters, Elsevier, vol. 14(2-3), pages 173-178. [Downloadable!] (restricted)
  8. Choi, Eun Kwan & Johnson, Stanley R, 1987. "Consumer's Surplus and Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 407-11, June. [Downloadable!] (restricted)
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  9. Blackorby, Charles & Boyce, Richard & Russell, R Robert, 1978. "Estimation of Demand Systems Generated by the Gorman Polar Form: A Generalization of the S-Branch Utility Tree," Econometrica, Econometric Society, vol. 46(2), pages 345-63, March. [Downloadable!] (restricted)
  10. Diewert, W.E., 1992. "Symmetric Means and Choice Under Uncertainty," UBC Departmental Archives 92-32, UBC Department of Economics.
  11. Hammond, Peter J., 1977. "Dual interpersonal comparisons of utility and the welfare economics of income distribution," Journal of Public Economics, Elsevier, vol. 7(1), pages 51-71, February. [Downloadable!] (restricted)
  12. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December. [Downloadable!] (restricted)
  13. Helms, L Jay, 1985. "Expected Consumer's Surplus and the Welfare Effects of Price Stabilization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 603-17, October. [Downloadable!] (restricted)
  14. Blackorby, Charles & Donaldson, David, 1999. "Market demand curves and Dupuit-Marshall consumers' surpluses: a general equilibrium analysis," Mathematical Social Sciences, Elsevier, vol. 37(2), pages 139-163, March. [Downloadable!] (restricted)
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