Measuring Consumer Welfare Using Statistical Demands
The equivalent or compensating variation for a price increase is often calculated using the expenditure function from a statistical (i.e. estimated) demand. If the regression errors are due to unobserved heterogeneity, then the variation from the statistical demand does not generally equal the mean variation for households, resulting in inconsistent estimates. We give conditions ensuring that the compensating variation from the statistical demand i) equals the mean compensating variation; ii) bounds the mean compensating variation; iii) is closer to the mean compensating variation than the change in consumers' surplus from the statistical demand. A necessary condition for ii) is that demands become more dispersed as income rises (for each class of households with the same demographic characteristics and income). This plausible necessary condition is not sufficient for either ii) or iii). If however we can write the indirect utility function for each household in the class as additively separable in income and the preference type, then increasing dispersion is equivalent to ii) and implies iii) if the good is normal. If household preferences are random, then the indirect (von Neumann-Morgenstern) utility function must be additive separability in income and the preference type if the compensating variation from the mean demand is even a first-order approximation to the ex ante compensating variation; consumers' surplus can easily be a better approximation when additive separability fails.
|Date of creation:|
|Contact details of provider:|| Postal: Box 873806, Tempe, AZ 85287-3806|
Phone: (480) 965-5514
Fax: (480) 965-0748
Web page: http://repec.wpcarey.asu.edu/RePEc/asu/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:asu:wpaper:2149162. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Steve Salik)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.