Transition choice probabilities and welfare analysis in additive random utility models

André de Palma () and Karim Kilani ()
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Karim Kilani: LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action - CNAM - Conservatoire National des Arts et Métiers [CNAM]

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Abstract: We study the descriptive and the normative consequences of price and/or other attributes changes in additive random utility models. We first derive expressions for the transition choice probabilities associated to these changes. A closed-form formula is obtained for the logit. We then use these expressions to compute the cumulative distribution functions of the compensating variation (CV) conditional on ex-ante and/or ex-post choices. The unconditional distribution is also provided. The conditional moments of the CV are obtained as a one-dimensional integral of the transition choice probabilities. This framework allows us to derive a stochastic version of Shephard's lemma, which relates the expected conditional CV and the transition choice probabilities. We compute the CV for a simple binary linear in income choice model and show that the information on the transitions leads to better estimates of the CV than those obtained when only ex-ante or ex-post information on individual choices is used. For the additive in income logit, we compute the conditional distribution of CV, which generalizes the logsum formula. Finally, we derive a new welfare formula for the disaggregated version of the representative consumer CES model.

Keywords: CES; Compensating variation; Logit; Random utility models; Shephard's lemma; Transition choice probabilities (search for similar items in EconPapers)
Date: 2011-03
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Citations: View citations in EconPapers (17)

Published in Economic Theory, 2011, 46 (3), pp.427-454. ⟨10.1007/s00199-009-0513-6⟩

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Journal Article: Transition choice probabilities and welfare analysis in additive random utility models (2011)
Working Paper: Transition choice probabilities and welfare analysis in additive random utility models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00783729

DOI: 10.1007/s00199-009-0513-6

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