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Nonlinear income effects in random utility models: revisiting the accuracy of the representative consumer approximation


  • Constant I. Tra


This article investigates the implications of nonlinear income effects in Random Utility Models (RUM) for measuring general equilibrium welfare impacts. A popular approach in applied welfare analysis is to approximate the expected compensating variation (cv) for an amenity change as the cv of a representative consumer whose indirect utility is given by the expected maximum utility. However, this approach can be misleading in the case of nonmarginal changes as it implies that changes in income do not affect the consumer's choice. In this case the true expected cv can be obtained via simulation. Empirical applications to recreational demand find that the bias from the representative approach is small. This article re-evaluates the accuracy of the representative consumer approximation in the context of measuring the general equilibrium welfare impacts of large environmental changes. Our findings suggest that, though the representative consumer approximation could lead to biased point estimates of the expected cv, this bias is overwhelmed by the size of the confidence intervals that result from the empirical estimation of household preferences.

Suggested Citation

  • Constant I. Tra, 2013. "Nonlinear income effects in random utility models: revisiting the accuracy of the representative consumer approximation," Applied Economics, Taylor & Francis Journals, vol. 45(1), pages 55-63, January.
  • Handle: RePEc:taf:applec:45:y:2013:i:1:p:55-63
    DOI: 10.1080/00036846.2011.589807

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    References listed on IDEAS

    1. Kling, Catherine L. & Bockstael, Nancy & Hanemann, W. Michael, 1987. "Estimating the Value of Water Quality Improvements in a Recreational Demand Framework," Staff General Research Papers Archive 1594, Iowa State University, Department of Economics.
    2. Joseph A. Herriges & Catherine L. Kling, 1999. "Nonlinear Income Effects in Random Utility Models," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 62-72, February.
    3. Holger Sieg & V. Kerry Smith & H. Spencer Banzhaf & Randy Walsh, 2004. "Estimating The General Equilibrium Benefits Of Large Changes In Spatially Delineated Public Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1047-1077, November.
    4. Patrick Bayer & Robert McMillan & Kim Rueben, 2004. "An Equilibrium Model of Sorting in an Urban Housing Market," NBER Working Papers 10865, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Delle Site, Paolo, 2013. "Integration of choice probabilities in logit," Economics Letters, Elsevier, vol. 120(1), pages 57-60.
    2. Delle Site, Paolo & Salucci, Marco Valerio, 2013. "Transition choice probabilities and welfare analysis in random utility models with imperfect before–after correlation," Transportation Research Part B: Methodological, Elsevier, vol. 58(C), pages 215-242.
    3. Dekker, Thijs, 2014. "Indifference based value of time measures for Random Regret Minimisation models," Journal of choice modelling, Elsevier, vol. 12(C), pages 10-20.

    More about this item

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand


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