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(Un)conditional distribution of compensating variation in discrete choice models


  • DE PALMA, André
  • KILANI, Karim


For a large class of additive random utility discrete choice models with income effects, we compute the probability distribution of the compensating variation. We show that the cumulative distribution function only depends on the choice probabilities. Our results are used to compute the distribution of equivalent variation. The moments of the compensating variation are a onedimensional integral of the choice probabilities. Using the expected compensating variation, we extend Shephard's Lemma to the probabilistic demand systems. Both conditional and unconditional (on the individual choice) distributions of compensating variation are considered.

Suggested Citation

  • DE PALMA, André & KILANI, Karim, 2003. "(Un)conditional distribution of compensating variation in discrete choice models," CORE Discussion Papers 2003100, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2003100

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    References listed on IDEAS

    1. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November.
    2. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    Cited by:

    1. Mark van Duijn & Jan Rouwendal, 2015. "Sorting based on Urban Heritage and Income: Evidence from the Amsterdam Metropolitan Area," Tinbergen Institute Discussion Papers 15-030/VIII, Tinbergen Institute.
    2. Yukihiro Kidokoro, 2007. "A Representative Consumer Framework for Discrete Choice Models with Endogenous Total Demand," GRIPS Discussion Papers 07-07, National Graduate Institute for Policy Studies, revised Nov 2008.
    3. Ismir Mulalic & Ninette Pilegaard & Jan Rouwendal, 2015. "Does improving Public Transport decrease Car Ownership? Evidence from the Copenhagen Metropolitan Area," Tinbergen Institute Discussion Papers 15-139/VIII, Tinbergen Institute.

    More about this item


    discrete choice models; income effect; compensating variation; equivalent variation;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D60 - Microeconomics - - Welfare Economics - - - General


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