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Welfare evaluation in a heterogeneous agent model: How representative is the CES representative consumer?

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  • Tito, Maria D.

Abstract

The present paper investigates the impact of asymmetric price changes on welfare in a model with heterogeneous consumers. I consider consumer heterogeneity à la Anderson et al. (1992). The standard welfare equivalence between the CES representative consumer and the discrete choice model breaks down in the presence of asymmetric price changes. In fact, asymmetric variations in prices produce differential gains among heterogeneous consumers. I show that there exists no feasible Kaldor–Hicks income transfer such that the gains are equally redistributed. This result suggests that only symmetric policy-induced price changes minimize the utility losses across heterogeneous consumers.

Suggested Citation

  • Tito, Maria D., 2016. "Welfare evaluation in a heterogeneous agent model: How representative is the CES representative consumer?," Economics Letters, Elsevier, vol. 143(C), pages 99-102.
    • Handle: RePEc:eee:ecolet:v:143:y:2016:i:c:p:99-102
    DOI: 10.1016/j.econlet.2016.04.005
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    Cited by:

    1. Matveenko, Andrei, 2020. "Logit, CES, and rational inattention," Economics Letters, Elsevier, vol. 186(C).

    More about this item

    Keywords

    Discrete choice models; CES representative consumer; Asymmetric price changes;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D60 - Microeconomics - - Welfare Economics - - - General
    • F10 - International Economics - - Trade - - - General

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