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Incomplete Demand Systems, Corner Solutions, and Welfare Measurement

Published online by Cambridge University Press:  15 September 2016

Roger H. von Haefen
Roger H. von Haefen*
Affiliation:
Department of Agricultural and Resource Economics at North Carolina State University in Raleigh, North Carolina
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Abstract

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.

Keywords

demand systemswelfare analysiscorner solutionsmicroeconometrics
Type
Contributed Papers
Information
Agricultural and Resource Economics Review , Volume 39 , Issue 1 , February 2010 , pp. 22 - 36
Copyright
Copyright © 2010 Northeastern Agricultural and Resource Economics Association 

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