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Characterizing Pareto Improvements in an Interdependent Demand System

Peter Kooreman and Lambert Schoonbeek

Journal of Public Economic Theory, 2004, vol. 6, issue 3, 427-443

Abstract: Interdependent preferences generally imply Pareto inefficiency. For a general demand system, we provide a characterization of Pareto improvements. For a prominent parametric specification, the Linear Expenditure System, we characterize in detail the welfare loss associated with interdependent preferences. Using an estimated empirical model of this kind, we calculate the compensating variation corresponding to the welfare loss. Copyright 2004 Blackwell Publishing Inc..

Date: 2004
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Handle: RePEc:bla:jpbect:v:6:y:2004:i:3:p:427-443