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Weak Separability in Applied Welfare Analysis

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  • Jeffrey T. LaFrance

Abstract

The focus of this paper is the impact on welfare measurement of a common assumption in applied demand analysis, weak separability. A standard empirical practice is to estimate conditional demand models for a set of goods which are assumed to be weakly separable from all other goods with expenditure as a right-hand-side variable, tacitly assuming that expenditure is predetermined (Alston and Chalfant 1987, 1991; Alston, Carter, Green, and Pick; Blackorby, Boyce, and Russell; Blisard and Blaylock; Brown and Heien; Cashin; Choi and Sosin; Clements and E. Selvanathan; Clements and S. Selvana-than; Deaton 1975; Goddard and Amuah; Gould, Cox, and Perali 1990, 1991; Heien; Heien and Pompelli 1988, 1989; Murray; Safyurtlu, John-son, and Hassan; Theil 1976, 1980; Van Ko-oten; Yen and Chern). Once estimated, such separable demand models often are used to cal-culate exact welfare measures, or changes in the true cost of living index, of the economic effects on consumers due to changes in the prices of the goods under study (Heien; Heien and Pom-pelli 1989; Van Kooten; Blisard and Blaylock). This practice is shown here to produce biased results. There are two sources of the bias and both can be traced to the inappropriate treatment of expenditure as predetermined. In an empiri-cal application to the U.S. dairy program, a comparison of estimates from an incomplete demand system specification versus a weakly separable specification suggests a negative bias of around 17% of the compensating variation due to eliminating price discrimination in federal milk marketing orders in 1990. Results from a Monte Carlo simulation suggest that the downward bias is closer to 40%. I first present the analysis of weak separability, then the empirical application, and a summary and conclusions.
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Suggested Citation

  • Jeffrey T. LaFrance, 1993. "Weak Separability in Applied Welfare Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(3), pages 770-775.
  • Handle: RePEc:oup:ajagec:v:75:y:1993:i:3:p:770-775.
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    Cited by:

    1. Vardges Hovhannisyan & Brian W. Gould, 2011. "Quantifying the structure of food demand in China: An econometric approach," Agricultural Economics, International Association of Agricultural Economists, vol. 42, pages 1-18, November.
    2. Lichtenberg, Erik & Strand, Ivar E., Jr., 2000. "Joint Adoption Of Multiple Technologies: A Dual, Latent Demand Approach," Working Papers 28566, University of Maryland, Department of Agricultural and Resource Economics.
    3. repec:ags:usao13:148045 is not listed on IDEAS
    4. Hayley H. Chouinard & David E. Davis & Jeffrey T. LaFrance & Jeffrey M. Perloff, 2010. "Milk Marketing Order Winners and Losers," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 59-76.
    5. Regmi, Madhav & Featherstone, Allen M., 2017. "Farm Households Consumption Heterogeneity And Rural Business Dynamics," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252755, Southern Agricultural Economics Association.
    6. Hovhannisyan, Vardges & Stiegert, Kyle W. & Bozic, Marin, 2013. "On Endogeneity Of Retail Market Power In An Equilibrium Analysis: A Control Function Approach," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149830, Agricultural and Applied Economics Association.
    7. Mario F. Teisl & Nancy E. Bockstael & Alan Levy, 2001. "Measuring the Welfare Effects of Nutrition Information," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 133-149.
    8. Huang, Pei, 2014. "An Inverse Demand System for Blue Crab in the Chesapeake Bay: Endogeneity and Seasonality," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169827, Agricultural and Applied Economics Association.
    9. repec:eee:ecoser:v:10:y:2014:i:c:p:61-78 is not listed on IDEAS
    10. Hovhannisyan, Vardges, 2016. "New Evidence On The Structure Of Food Demand In China: An Easi Demand Model Estimated Via Panel Data Techniques," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 236889, Agricultural and Applied Economics Association.
    11. Dhar, Tirtha & Chavas, Jean-Paul & Gould, Brian W., 2002. "An Empirical Assessment of Endogeneity Issues in Demand Analysis for Differentiated Products," Working Papers 201561, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    12. repec:bla:jageco:v:68:y:2017:i:2:p:386-406 is not listed on IDEAS
    13. Hovhannisyan, Vardges & Bozic, Marin, 2014. "On Price Endogeneity in the Analysis of Food Demand in China," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169767, Agricultural and Applied Economics Association.
    14. Ming-Feng Hsieh & Paul D. Mitchell & Kyle W. Stiegert, 2009. "Potato demand in an increasingly organic marketplace," Agribusiness, John Wiley & Sons, Ltd., vol. 25(3), pages 369-394.
    15. Teisl, Mario F. & Levy, Alan S. & Bockstael, Nancy E., 1998. "Nutrition Labeling: Does The Message Reach The Consumer?," 1998 Annual meeting, August 2-5, Salt Lake City, UT 21021, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    16. Jeffrey T. LaFrance & Rulon D. Pope, 2008. "Homogeneity and Supply," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 606-612.
    17. Bockstael, Nancy E. & Freeman III, A. Myrick, 2006. "Welfare Theory and Valuation," Handbook of Environmental Economics,in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 12, pages 517-570 Elsevier.
    18. Teisl, Mario F. & Roe, Brian & Hicks, Robert L., 2002. "Can Eco-Labels Tune a Market? Evidence from Dolphin-Safe Labeling," Journal of Environmental Economics and Management, Elsevier, vol. 43(3), pages 339-359, May.
    19. 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.
    20. Mazzocchi, Mario & Stefani, Gianluca, 2002. "Consumer Welfare and the Loss Induced by Withheld Information: The Case of BSE in Italy," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24927, European Association of Agricultural Economists.
    21. Cunha-e-Sa, Maria A. & Ducla-Soares, Maria M., 1999. "Specification Tests for Mixed Demand Systems with an Emphasis on Combining Contingent Valuation and Revealed Data," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 215-233, September.
    22. Hovhannisyan, Vardges & Stiegert, Kyle & Bozic, Marin, 2014. "On the Endogeneity of Retail Markups in an Equilibrium Analysis: A Control-Function Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 39(2), August.
    23. Njonou, Rabelais Yankam & Frahan, Bruno Henry de & Surry, Yves R., 2002. "Testing Separability for Common Wheat Qualities in French Import Demand Market Using Aids and Rotterdam Demand Models," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24921, European Association of Agricultural Economists.
    24. Hovhannisyan, Vardges & Gould, Brian W., 2010. "Quantifying the Structure of Food Demand in China Using a Generalized Quadratic AIDS Specification," 2010 Annual Meeting, February 6-9, 2010, Orlando, Florida 56422, Southern Agricultural Economics Association.
    25. Hovhannisyan, Vardges & Bozic, Marin, 2013. "On Price Endogeneity in the Analysis of Food Demand in China," Staff Papers 159771, University of Minnesota, Department of Applied Economics.

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