Transition choice probabilities and welfare analysis in additive random utility models
We study the descriptive and the normative consequences of price and/or other attributes changes in additive random utility models. We first derive expressions for the transition choice probabilities associated to these changes. A closed-form formula is obtained for the logit. We then use these expressions to compute the cumulative distribution functions of the compensating variation (CV) conditional on ex-ante and/or ex-post choices. The unconditional distribution is also provided. The conditional moments of the CV are obtained as a one-dimensional integral of the transition choice probabilities. This framework allows us to derive a stochastic version of Shephard's lemma, which relates the expected conditional CV and the transition choice probabilities. We compute the CV for a simple binary linear in income choice model and show that the information on the transitions leads to better estimates of the CV than those obtained when only ex-ante or ex-post information on individual choices is used. For the additive in income logit, we compute the conditional distribution of CV, which generalizes the logsum formula. Finally, we derive a new welfare formula for the disaggregated version of the representative consumer CES model.
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Volume (Year): 46 (2011)
Issue (Month): 3 (April)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Train,Kenneth E., 2009.
"Discrete Choice Methods with Simulation,"
Cambridge University Press, number 9780521747387, September.
- Daniel McFadden, 2005. "Revealed stochastic preference: a synthesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 245-264, 08.
- Pedro Mira & Victor Aguirregabiria, 2007.
"Dynamic Discrete Choice Structural Models: A Survey,"
- Aguirregabiria, Victor & Mira, Pedro, 2010. "Dynamic discrete choice structural models: A survey," Journal of Econometrics, Elsevier, vol. 156(1), pages 38-67, May.
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