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Incomplete Demand Systems, Corner Solutions, and Welfare Measurement

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  • von Haefen, Roger H.

Abstract

This paper demonstrates how corner solutions raise difficulties for the specification, estimation, and use of incomplete demand systems for welfare measurement with disaggregate consumption data, as is common in the outdoor recreation literature. A simple analytical model of consumer behavior is used to elucidate the potential biases for welfare measurement arising from modeling the demand for M goods as a function of M + N prices (N > 1) and income when individuals do not consume all goods in strictly positive quantities. Results from a Monte Carlo experiment suggest that these biases can be substantial for large-scale policy shocks when prices are highly correlated.

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  • von Haefen, Roger H., 2010. "Incomplete Demand Systems, Corner Solutions, and Welfare Measurement," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 39(1), February.
  • Handle: RePEc:ags:arerjl:59327
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    References listed on IDEAS

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    1. Daniel J. Phaneuf & Catherine L. Kling & Joseph A. Herriges, 2000. "Estimation and Welfare Calculations in a Generalized Corner Solution Model with an Application to Recreation Demand," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 83-92, February.
    2. Phaneuf, Daniel J. & Carbone, Jared C. & Herriges, Joseph A., 2009. "Non-price equilibria for non-marketed goods," Journal of Environmental Economics and Management, Elsevier, vol. 57(1), pages 45-64, January.
    3. Larry G. Epstein, 1982. "Integrability of Incomplete Systems of Demand Functions," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 411-425.
    4. von Haefen, Roger H. & Phaneuf, Daniel J., 2003. "Estimating preferences for outdoor recreation:: a comparison of continuous and count data demand system frameworks," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 612-630, May.
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    6. 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.
    7. V. Kerry Smith, 1993. "Welfare Effects, Omitted Variables, and the Extent of the Market," Land Economics, University of Wisconsin Press, vol. 69(2), pages 121-131.
    8. von Haefen, Roger H., 2007. "Empirical strategies for incorporating weak complementarity into consumer demand models," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 15-31, July.
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    10. Joseph A. Herriges & Catherine L. Kling, 1998. "Valuing Water Quality Improvements Using Revealed Preference Methods When Corner Solutions Are Present," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(5), pages 1025-1031.
    11. John G. Hof & David A. King, 1982. "On the Necessity of Simultaneous Recreation Demand Equation Estimation," Land Economics, University of Wisconsin Press, vol. 58(4), pages 547-552.
    12. Ozuna, Teofilo, Jr & Gomez, Irma Adriana, 1994. "Estimating a System of Recreation Demand Functions Using a Seemingly Unrelated Poisson Regression Approach," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 356-360, May.
    13. Lee, Lung-Fei & Pitt, Mark M, 1986. "Microeconometric Demand Systems with Binding Nonnegativity Constraints: The Dual Approach," Econometrica, Econometric Society, vol. 54(5), pages 1237-1242, September.
    14. Jeffrey T. LaFrance & W. Michael Hanemann, 1989. "The Dual Structure of Incomplete Demand Systems," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(2), pages 262-274.
    15. Eom, Young-Sook & Larson, Douglas M., 2006. "Improving environmental valuation estimates through consistent use of revealed and stated preference information," Journal of Environmental Economics and Management, Elsevier, vol. 52(1), pages 501-516, July.
    16. Kling, Catherine L., 1989. "Note on the Welfare Effects of Omitting Substitute Prices and Qualities from Travel Cost Models (A)," Staff General Research Papers Archive 1593, Iowa State University, Department of Economics.
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    1. repec:eee:jeeman:v:88:y:2018:i:c:p:159-179 is not listed on IDEAS
    2. Pinjari, Abdul Rawoof & Augustin, Bertho & Sivaraman, Vijayaraghavan & Faghih Imani, Ahmadreza & Eluru, Naveen & Pendyala, Ram M., 2016. "Stochastic frontier estimation of budgets for Kuhn–Tucker demand systems: Application to activity time-use analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 88(C), pages 117-133.
    3. Bhat, Chandra R. & Castro, Marisol & Pinjari, Abdul Rawoof, 2015. "Allowing for complementarity and rich substitution patterns in multiple discrete–continuous models," Transportation Research Part B: Methodological, Elsevier, vol. 81(P1), pages 59-77.
    4. Castro, Marisol & Bhat, Chandra R. & Pendyala, Ram M. & Jara-Díaz, Sergio R., 2012. "Accommodating multiple constraints in the multiple discrete–continuous extreme value (MDCEV) choice model," Transportation Research Part B: Methodological, Elsevier, vol. 46(6), pages 729-743.

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