Nonlinear Income Effects in Random Utility Models: Revisiting the Accuracy of the Representative Consumer Approximation

Constant Tra ()

No 924, Working Papers from University of Nevada, Las Vegas , Department of Economics

Abstract: The paper investigates the implications of nonlinear income effects in random utility models (RUM) for measuring non-marginal welfare impacts. A popular approach in applied welfare analysis is to approximate the expected compensating variation (cv) for an amenity change as the cv of a representative consumer whose indirect utility is given by the expected maximum utility. However, this approach can be misleading in the case of non-marginal changes as it implies that changes in income do not affect the consumer’s choice. In this case the true expected cv can be obtained via simulation. Empirical applications to recreational demand find that the bias from the representative approach is small. This paper re-evaluates the accuracy of the representative consumer approximation in the context of measuring the general equilibrium welfare impacts of large environmental changes. Our findings suggest that, though the representative consumer approximation could lead to biased point estimates of the expected cv, this bias is overwhelmed by the size of the confidence intervals that result from the empirical estimation of household preferences.

Keywords: compensating variation; nonlinear income effects; discrete choice (search for similar items in EconPapers)
JEL-codes: Q51 R21 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2009-03
New Economics Papers: this item is included in nep-dcm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://web.unlv.edu/projects/RePEc/pdf/0924.pdf First version, 2009 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to web.unlv.edu:80 (No such host is known. )

Related works:
Journal Article: Nonlinear income effects in random utility models: revisiting the accuracy of the representative consumer approximation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nlv:wpaper:0924

Access Statistics for this paper

More papers in Working Papers from University of Nevada, Las Vegas , Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bill Robinson ().