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Incomplete Demand Systems, Corner Solutions, and Welfare Measurement

  • von Haefen, Roger H.

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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File URL: http://purl.umn.edu/59327
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Article provided by Northeastern Agricultural and Resource Economics Association in its journal Agricultural and Resource Economics Review.

Volume (Year): 39 (2010)
Issue (Month): 1 (February)
Pages:

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Handle: RePEc:ags:arerjl:59327
Contact details of provider: Web page: http://www.narea.org/

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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. Epstein, Larry G, 1982. "Integrability of Incomplete Systems of Demand Functions," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 411-25, July.
  3. 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.
  4. 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.
  5. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
  6. 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.
  7. Lee, Lung-Fei & Pitt, Mark M, 1986. "Microeconometric Demand Systems with Binding Nonnegativity Constraints: The Dual Approach," Econometrica, Econometric Society, vol. 54(5), pages 1237-42, September.
  8. Gurmu, Shiferaw & Trivedi, Pravin K, 1996. "Excess Zeros in Count Models for Recreational Trips," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 469-77, October.
  9. 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 356-60, May.
  10. Jeffrey T. LaFrance & W. Michael Hanemann, 1989. "The Dual Structure of Incomplete Demand Systems," Monash Economics Working Papers archive-21, Monash University, Department of Economics.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. Phaneuf, Daniel J. & Kling, Catherine L. & Herriges, Joseph A., 1998. "Valuing Water Quality Improvements Using Revealed Preference Methods When Corner Solutions Are Present," Staff General Research Papers 1377, Iowa State University, Department of Economics.
  17. Kling, Catherine L., 1989. "Note on the Welfare Effects of Omitting Substitute Prices and Qualities from Travel Cost Models (A)," Staff General Research Papers 1593, Iowa State University, Department of Economics.
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