Incomplete Demand Systems, Corner Solutions, and Welfare Measurement

This paper demonstrates how corner solutions raise difficulties for the specification, estimation, and use of incomplete demand systems for welfare measurement with disaggregate consumption data, as is common in the outdoor recreation literature. A simple analytical model of consumer behavior is used to elucidate the potential biases for welfare measurement arising from modeling the demand for M goods as a function of M + N prices (N > 1) and income when individuals do not consume all goods in strictly positive quantities. Results from a Monte Carlo experiment suggest that these biases can be substantial for large-scale policy shocks when prices are highly correlated.


Issue Date:
2010-02
Publication Type:
Journal Article
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/59327
PURL Identifier:
http://purl.umn.edu/59327
Published in:
Agricultural and Resource Economics Review, 39, 1
Page range:
22-36
Total Pages:
15




 Record created 2017-04-01, last modified 2019-08-26

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