Welfare evaluation in a heterogeneous agent model: How representative is the CES representative consumer?

Maria D. Tito

Economics Letters, 2016, vol. 143, issue C, 99-102

Abstract: The present paper investigates the impact of asymmetric price changes on welfare in a model with heterogeneous consumers. I consider consumer heterogeneity à la Anderson et al. (1992). The standard welfare equivalence between the CES representative consumer and the discrete choice model breaks down in the presence of asymmetric price changes. In fact, asymmetric variations in prices produce differential gains among heterogeneous consumers. I show that there exists no feasible Kaldor–Hicks income transfer such that the gains are equally redistributed. This result suggests that only symmetric policy-induced price changes minimize the utility losses across heterogeneous consumers.

Keywords: Discrete choice models; CES representative consumer; Asymmetric price changes (search for similar items in EconPapers)
JEL-codes: D11 D60 F10 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:143:y:2016:i:c:p:99-102

DOI: 10.1016/j.econlet.2016.04.005

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