Hicksian Welfare Measures and the Normative Endowment Effect
نویسنده
چکیده
The equivalent variation and the compensating variation, introduced by John R. Hicks (1939), are used in demand theory to monetize the effect of a given welfare change on a consumer. The compensating variation C corresponds to the consumer’s willingness to pay (WTP) to effectuate the welfare change, while the equivalent variation E measures the consumer’s willingness to accept (WTA) to reverse the welfare change. In the interesting case where both measures are finite, the changes in the consumer’s income prescribed by C and E exactly offset the welfare change either before or after it takes place. The monetary variations measure the income effect of the welfare change, either from an ex ante or an ex post perspective. More generally, both of these Hicksian welfare measures can be used for the evaluation of any change of state (which implies a change of welfare), as long as the agent’s indirect utility for income is well-defined before and after the change. Our aim is to examine the properties of WTA and WTP as a function of income and to clarify the normative relationship between them. The latter helps in refocussing empirical efforts to measure the well-known endowment effect. We provide an exact relation between compensating and equivalent variation (Proposition 2); one can be obtained from the other by evaluating it at a suitably compensated income. Knowing the corresponding “compensated-income function” is equivalent to knowing either one of the classical Hicksian welfare
منابع مشابه
Hicksian Surplus Measures of Individual Welfare Change When There is Price and Income Uncertainty
متن کامل
On the axiomatic foundations of aggregate consumer surplus measures
In standard economic environments, axiomatic foundations are developed for the two aggregate Hicksian consumer surplus measures aggregate willingness-to-pay (compensating variation) and aggregate willingness-to-accept (equivalent variation) as ordinal social welfare indices, without the imposition of any extraneous assumptions such as the interpersonal utility comparison and the expected utilit...
متن کاملMeasuring Hicksian Welfare Changes From Marshallian Demand Functions
A problem persists in measuring the welfare effects of simultaneous price and income changes because the Hicksian compensating variation (CV) and equivalent variation (EV), while unique, are based on unobservable (Hicksian) demand functions, and observable (Marshallian) demand functions do not necessarily yield a unique Marshallian consumer's surplus (CS). This paper proposes a solution by a Ta...
متن کاملUnderstanding the Welfare Implications of Preferential Trade Agreements
This paper examines various implications of Preferential Trade Agreements (PTAs), namely Customs Unions (CUs) and Free Trade Areas (FTAs), in the context of a multi-country general equilibrium model based on comparative advantage considerations. We calibrate the model to represent countries with symmetric endowments, and compare the impact of those agreements with free trade and a non-cooperati...
متن کاملA behavioral theory of the consumer under reference dependent preferences and certainty:∗
We extend classical consumer theory to account for reference dependence and loss aversion under complete certainty. The classical results obtain as a special case. Several new results emergethere is a kink in the demand curve at the reference point, consumers are subject to money illusion, and some kinds of inconsistencies of preferences can be accounted for. However, the reference dependent mo...
متن کامل