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Characterizing Pareto Improvements in an Interdependent Demand System

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  • Peter Kooreman
  • Lambert Schoonbeek

Abstract

Interdependent preferences generally imply Pareto inefficiency. For a general demand system, we provide a characterization of Pareto improvements. For a prominent parametric specification, the Linear Expenditure System, we characterize in detail the welfare loss associated with interdependent preferences. Using an estimated empirical model of this kind, we calculate the compensating variation corresponding to the welfare loss.

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  • Peter Kooreman & Lambert Schoonbeek, 2004. "Characterizing Pareto Improvements in an Interdependent Demand System," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 427-443, August.
    • Handle: RePEc:bla:jpbect:v:6:y:2004:i:3:p:427-443
    DOI: 10.1111/j.1467-9779.2004.00173.x
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    2. Grodner, Andrew & Kniesner, Thomas J. & Bishop, John A., 2011. "Social Interactions in the Labor Market," Foundations and Trends(R) in Microeconomics, now publishers, vol. 6(4), pages 265-366, September.
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    4. Grodner, Andrew & Kniesner, Thomas J., 2008. "Distribution of Wealth and Interdependent Preferences," IZA Discussion Papers 3684, Institute of Labor Economics (IZA).
    5. Andrew Grodner & Thomas J. Kniesner, 2008. "Labor supply with social interactions: econometric estimates and their tax policy implications," Research in Labor Economics, in: Work, Earnings and Other Aspects of the Employment Relation, pages 1-23, Emerald Group Publishing Limited.

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