Measuring Welfare Effects in Models with Random Coefficients

In economic research, it is often important to express the marginal value of a variable in monetary terms. This marginal monetary value is the ratio of two partial derivatives of the conditional indirect utility function, which reduces to the ratio of two coefficients if the utility function is linear. Based on the overwhelming evidence of taste differences among people, random coefficient models have become increasingly more popular in recent years. In random coefficient models, the marginal monetary value is the ratio of two random coefficients and is thus random itself. In this paper, we study the distribution of this ratio and particularly the consequences of different distributional assumptions about the coefficients. It is shown both analytically and empirically that important characteristics of the distribution of the marginal monetary value may be sensitive to the distributional assumptions about the random coefficients. The median, however, is much less sensitive than the mean. The authors would like to thank Ton Steerneman for stimulating discussions and helpful comments. ∗ Department of Econometrics, University of Groningen, P.O. Box 800, 9700 AV Groningen, THE NETHERLANDS. E-mail: [email protected]. † Department of Economics, Wageningen Agricultural University, and MuConsult.