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Compensating Variation Without Apology? Willingness-To-Pay And The Failure Of Integrability

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  • Just, Richard E.
  • Gilligan, Daniel O.

Abstract

Failure of integrability is shown to cause path-dependence of willingness-to-pay measures of welfare change. Using the linear expenditure system, effects of failure of integrability are negligible (substantial) for estimating income (price) elasticities. For single price changes, Hausman's approach to calculating willingness to pay from ordinary demands becomes subject to excessive errors of estimation. For multiple price changes, calculations of willingness to pay become path dependent. The empirical approach of Vartia to calculation of willingness to pay for multiple price changes thus involves an arbitrary choice of path. Furthermore, the Willig results justifying consumer surplus approximation fail.

Suggested Citation

  • Just, Richard E. & Gilligan, Daniel O., 1998. "Compensating Variation Without Apology? Willingness-To-Pay And The Failure Of Integrability," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20814, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea98:20814
    DOI: 10.22004/ag.econ.20814
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    References listed on IDEAS

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    1. Jeffrey T. LaFrance, 1986. "The Structure of Constant Elasticity Demand Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(3), pages 543-552.
    2. Hause, John C, 1975. "The Theory of Welfare Cost Measurement," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1145-1182, December.
    3. LaFrance, Jeffrey T., 1985. "Linear demand functions in theory and practice," Journal of Economic Theory, Elsevier, vol. 37(1), pages 147-166, October.
    4. Vartia, Yrjo O, 1983. "Efficient Methods of Measuring Welfare Change and Compensated Income in Terms of Ordinary Demand Functions," Econometrica, Econometric Society, vol. 51(1), pages 79-98, January.
    5. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
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    Cited by:

    1. James Stodder, 2013. "The strange persistence of consumer surplus," Applied Economics Letters, Taylor & Francis Journals, vol. 20(11), pages 1096-1099, July.

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