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A new approach to calculating welfare measures in Kuhn-Tucker demand models

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  • Lloyd-Smith, Patrick

Abstract

I develop a new approach to calculating welfare measures in Kuhn-Tucker consumer demand models that uses the analytical properties of the Multiple Discrete-Continuous Extreme Value (MDCEV) specification. I adapt Pinjari and Bhat's (2011) Marshallian demand forecasting routine to calculate Hicksian demands that are useful for computing welfare measures. Simulations demonstrate that this new approach substantially reduces computational time relative to the existing approach using a numerical bisection routine. The new approach performs best relative to the numerical bisection routine if i) a γ-profile utility function is specified, ii) the number of choice alternatives available is high, or iii) the average number of chosen alternatives is low.

Suggested Citation

  • Lloyd-Smith, Patrick, 2018. "A new approach to calculating welfare measures in Kuhn-Tucker demand models," Journal of choice modelling, Elsevier, vol. 26(C), pages 19-27.
    • Handle: RePEc:eee:eejocm:v:26:y:2018:i:c:p:19-27
    DOI: 10.1016/j.jocm.2017.12.002
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    References listed on IDEAS

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    1. Daniel J. Phaneuf & Catherine L. Kling & Joseph A. Herriges, 2000. "Estimation and Welfare Calculations in a Generalized Corner Solution Model with an Application to Recreation Demand," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 83-92, February.
    2. von Haefen R.H. & Phaneuf D.J. & Parsons G.R., 2004. "Estimation and Welfare Analysis With Large Demand Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 194-205, April.
    3. Vasquez Lavin, Felipe & Hanemann, W. Michael, 2008. "Functional Forms in Discrete/Continuous Choice Models With General Corner Solution," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7z25t659, Department of Agricultural & Resource Economics, UC Berkeley.
    4. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    5. von Haefen, Roger H., 2007. "Empirical strategies for incorporating weak complementarity into consumer demand models," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 15-31, July.
    6. Bhat, Chandra R., 2008. "The multiple discrete-continuous extreme value (MDCEV) model: Role of utility function parameters, identification considerations, and model extensions," Transportation Research Part B: Methodological, Elsevier, vol. 42(3), pages 274-303, March.
    7. Chandra Bhat & Abdul Pinjari, 2014. "Multiple discrete-continuous choice models: a reflective analysis and a prospective view," Chapters, in: Stephane Hess & Andrew Daly (ed.), Handbook of Choice Modelling, chapter 19, pages 427-454, Edward Elgar Publishing.
    8. Herriges, Joseph A. & Phaneuf, Daniel J., 1999. "Choice Set Definition Issues in a Kuhn-Tucker Model of Recreation Demand," Staff General Research Papers Archive 5222, Iowa State University, Department of Economics.
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    Cited by:

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    2. Thijs Dekker & Paul (P.R.) Koster & Niek Mouter, 2019. "The economics of participatory value evaluation," Tinbergen Institute Discussion Papers 19-008/VIII, Tinbergen Institute.
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    5. Xie, Lusi & Adamowicz, Wiktor & Lloyd-Smith, Patrick, 2023. "Spatial and temporal responses to incentives: An application to wildlife disease management," Journal of Environmental Economics and Management, Elsevier, vol. 117(C).
    6. Hanemann, Michael & Labandeira, Xavier & Labeaga, José M. & Vásquez-Lavín, Felipe, 2024. "Discrete-continuous models of residential energy demand: A comprehensive review," Resource and Energy Economics, Elsevier, vol. 77(C).

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