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Compensated Variation in Random Utility Models

In this paper we introduce the notion of random expenditure function and derive the distribution of the expenditure function and corresponding compensated choice probabilities in the general case when the (random) utilities are nonlinear in income. We also derive formulae for expenditure and choice under price (policy) changes conditional on the initial utility level. This is of particular interest for welfare measurement because it enables the researcher to analyze the distribution of Compensating variation.

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Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 299.

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Date of creation: Jun 2001
Date of revision:
Handle: RePEc:ssb:dispap:299
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  1. Daniel McFadden, 1996. "Computing Willingness-to-Pay in Random Utility Models," Working Papers _011, University of California at Berkeley, Econometrics Laboratory Software Archive.
  2. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  3. Herriges, Joseph A. & Kling, Catherine L., 1999. "Nonlinear Income Effects in Random Utility Models," Staff General Research Papers 1494, Iowa State University, Department of Economics.
  4. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
  5. P O Lindberg & E A Eriksson & L-G Mattsson, 1995. "Invariance of achieved utility in random utility models," Environment and Planning A, Pion Ltd, London, vol. 27(1), pages 121-142, January.
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