Nonparametric estimation of a compensating variation: the cost of disability

Stephen Pudney, Ruth Hancock and Marcello Morciano

No 2013-26, ISER Working Paper Series from Institute for Social and Economic Research

Abstract: We propose a nonparametric matching approach to estimation of implicit costs based on the compensating variation (CV) principle. We apply the method to estimate the additional personal costs experienced by disabled older people in Great Britain, finding that those costs are substantial, averaging in the range £48-61 a week, compared with the mean level of state disability benefit (£28) or total public support (£47) received. Estimated costs rise strongly with the severity of disability. We compare the nonparametric approach with the standard parametric method, finding that the latter tends to generate large overestimates unless conditions are ideal. The nonparametric approach has much to recommend it.

Date: 2013-12-04
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