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Transition choice probabilities and welfare analysis in random utility models

Author

Listed:
  • André de Palma

    (Member of the Institut Universitaire de France THEMA, Université de Cergy-Pontoise and ENPC, Paris)

  • Karim Kilani

    (GREG, Conservatoire National des Arts et M´etiers 2 rue Cont´e, 75003, Paris, France)

Abstract

We study the descriptive and the normative consequences of attribute changes in standard discrete choice models. For additive random utility models, we derive expressions for the transition choice probabilities for a change in the systematic utility. We then use these expressions to compute the CDF’s of the compensating variation conditional on the initial and on the final choices. The conditional moments of the compensating variation are obtained as a one-dimensional integral of the transition choice probabilities. We also provide a stochastic version of Shephard’s Lemma when transitions are observed. Example of the logit and the disaggregated CES are also studied.

Suggested Citation

  • André de Palma & Karim Kilani, 2007. "Transition choice probabilities and welfare analysis in random utility models," THEMA Working Papers 2007-19, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2007-19
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    File URL: http://thema.u-cergy.fr/IMG/documents/2007-19.pdf
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    More about this item

    Keywords

    Random Utility Models; Transition Choice Probabilities; Multinomial Logit Model; CES; Conditional Compensating Variation; Shephard’s Lemma.;
    All these keywords.

    JEL classification:

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

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