Provider: ingentaconnect
Database: ingentaconnect
Content: application/x-research-info-systems
TY - ABST
AU - Tra, Constant I.
TI - Nonlinear income effects in random utility models: revisiting the accuracy of the representative consumer approximation
JO - Applied Economics
PY - 2013-01-01T00:00:00///
VL - 45
IS - 1
SP - 55
EP - 63
KW - discrete choice
KW - Q51
KW - R21
KW - compensating variation
KW - nonlinear income effects
N2 - This article investigates the implications of nonlinear income effects in Random Utility Models (RUM) for measuring general equilibrium 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 nonmarginal 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 article 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.
UR - http://www.ingentaconnect.com/content/routledg/raef/2013/00000045/00000001/art00005
M3 - doi:10.1080/00036846.2011.589807
UR - http://dx.doi.org/10.1080/00036846.2011.589807
ER -