Measuring Welfare Effects in Models with Random Coefficients

SOM Research Report No. 00F25, University of Groningen

55 Pages Posted: 7 May 2012

See all articles by Erik Meijer

Erik Meijer

University of Southern California; RAND Corporation

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2000

Abstract

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.

Suggested Citation

Meijer, Erik and Rouwendal, Jan, Measuring Welfare Effects in Models with Random Coefficients (July 20, 2000). SOM Research Report No. 00F25, University of Groningen, Available at SSRN: https://ssrn.com/abstract=2052673 or http://dx.doi.org/10.2139/ssrn.2052673

Erik Meijer (Contact Author)

University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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