Compensating the Compensating Variation

Ana-Isabel Guerra and Ferran Sancho ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: The message of this note is that in a general equilibrium setting the compensating variation is numéraire dependent. In contrast, the equivalent variation is neutral regarding the choice of value units. We illustrate with a simple example and propose an even simpler solution to overcome this bias in the compensating variation; all that is required to have a correct welfare estimate is to compensate the compensating variation by normalization with a price index. This type of correction is necessary to overcome the often blind implementation of welfare measures in numerical general equilibrium.

Keywords: Compensating variation; equivalent variation; Konüs index; computable general equilibrium. (search for similar items in EconPapers)
JEL-codes: D11 D12 D60 (search for similar items in EconPapers)
Pages: 4
Date: 2017-02-16
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:961.17

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