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Transition choice probabilities and welfare in ARUM's

Author

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  • André de Palma

    (ENS Cachan - École normale supérieure - Cachan, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Karim Kilani

    (CNAM Paris - Centre d'enseignement Cnam Paris - CNAM - Conservatoire National des Arts et Métiers [CNAM])

Abstract

We study the descriptive and the normative consequences of price and/or other attributes changes in additive random utility models. We first derive expressions for the transition choice probabilities associated to these changes. A closed-form formula is obtained for the logit. We then use these expressions to compute the cumulative distribution functions of the compensating variation conditional on ex-ante and/or ex-post choices. The unconditional distribution is also provided. The conditional moments of the compensating variation are obtained as a one-dimensional integral of the transition choice probabilities. This framework allows us to derive a stochastic version of Shephard's lemma, which relates the expected conditional compensating variation and the transition choice probabilities. We compute the compensating variation for a simple binary linear in income choice model and show that the information on the transitions leads to better estimates of the compensating variation than those obtained when only ex-ante or ex-post information on individual choices is observed. For the additive in income logit, we compute the conditional distribution of compensating variation, which generalizes the logsum formula. Finally, we derive a new welfare formula for the disaggregated version of the represen- tative consumer CES model.

Suggested Citation

  • André de Palma & Karim Kilani, 2009. "Transition choice probabilities and welfare in ARUM's," Working Papers hal-00417493, HAL.
    • Handle: RePEc:hal:wpaper:hal-00417493
    Note: View the original document on HAL open archive server: https://hal.science/hal-00417493
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    References listed on IDEAS

    as
    1. de Palma, Andre & Kilani, Karim, 2005. "Switching in the logit," Economics Letters, Elsevier, vol. 88(2), pages 196-202, August.
    2. de Jong, Gerard & Daly, Andrew & Pieters, Marits & van der Hoorn, Toon, 2007. "The logsum as an evaluation measure: Review of the literature and new results," Transportation Research Part A: Policy and Practice, Elsevier, vol. 41(9), pages 874-889, November.
    3. de Palma, Andre & Kilani, Karim, 2007. "Invariance of conditional maximum utility," Journal of Economic Theory, Elsevier, vol. 132(1), pages 137-146, January.
    4. von Haefen, Roger H., 2003. "Incorporating observed choice into the construction of welfare measures from random utility models," Journal of Environmental Economics and Management, Elsevier, vol. 45(2), pages 145-165, March.
    5. John K. Dagsvik & Anders Karlström, 2005. "Compensating Variation and Hicksian Choice Probabilities in Random Utility Models that are Nonlinear in Income," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 57-76.
    6. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, November.
    7. Anderson, Simon P. & De Palma, Andre & Thisse, Jacques-Francois, 1987. "The CES is a discrete choice model?," Economics Letters, Elsevier, vol. 24(2), pages 139-140.
    8. Daniel McFadden, 2005. "Revealed stochastic preference: a synthesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 245-264, August.
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