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Characterizing Pareto Improvements in an Interdependent Demand System


  • Peter Kooreman
  • Lambert Schoonbeek


Interdependent preferences generally imply Pareto inefficiency. For a general demand system, we provide a characterization of Pareto improvements. For a prominent parametric specification, the Linear Expenditure System, we characterize in detail the welfare loss associated with interdependent preferences. Using an estimated empirical model of this kind, we calculate the compensating variation corresponding to the welfare loss. Copyright 2004 Blackwell Publishing Inc..

Suggested Citation

  • Peter Kooreman & Lambert Schoonbeek, 2004. "Characterizing Pareto Improvements in an Interdependent Demand System," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 427-443, August.
  • Handle: RePEc:bla:jpbect:v:6:y:2004:i:3:p:427-443

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    References listed on IDEAS

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    7. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
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    Cited by:

    1. Emanuela Randon & Peter Simmons, 2007. "Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(5), pages 831-866, October.
    2. Andrew Grodner & Thomas Kniesner, 2005. "Labor Supply with Social Interactions: Econometric Estimates and Their Tax Policy Implications," Center for Policy Research Working Papers 69, Center for Policy Research, Maxwell School, Syracuse University.
    3. Grodner, Andrew & Kniesner, Thomas J. & Bishop, John A., 2011. "Social Interactions in the Labor Market," Foundations and Trends(R) in Microeconomics, now publishers, vol. 6(4), pages 265-366, September.
    4. Peter Kooreman, 2007. "Time, money, peers, and parents; some data and theories on teenage behavior," Journal of Population Economics, Springer;European Society for Population Economics, vol. 20(1), pages 9-33, February.
    5. Grodner, Andrew & Kniesner, Thomas J., 2008. "Distribution of Wealth and Interdependent Preferences," IZA Discussion Papers 3684, Institute for the Study of Labor (IZA).

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