A Complete Characterization of Potential Compensation Tests of Hicksian Welfare Measures

Donald Keenan and Arthur Snow

Canadian Journal of Economics, 1999, vol. 32, issue 1, 215-233

Abstract: In this paper, the authors present complete characterizations of the compensation tests for potential Pareto superiority proposed by Kaldor, Hicks, and Samuelson in terms of the aggregate Hicksian measures of income compensation, including compensating and equivalent variations. The key to obtaining these characterizations lies in recognizing that each potential compensation test entails a search over possible outcomes, rather than a comparison of only the new and original outcomes, as with standard cost-benefit measurements. The search implied by each compensation test can, in principle, be replicated by using the aggregate Hicksian welfare measures.

Date: 1999
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