Nonparametric welfare analysis for discrete choice

Working paper

We consider empirical measurement of exact equivalent/compensating variation resulting from price-change of a discrete good, using individual-level data. We show that for binary and multinomial choice, the marginal distributions of EV/CV are nonparametrically point-identified solely from the conditional choice-probabilities, under extremely general preference-distributions. These results hold even when the distribution/dimension of unobserved heterogeneity are neither specified, nor identified and utilities are neither quasi-linear nor parametrically specified. Welfare-distributions can be expressed as closed-form functionals of observable individual choice-probabilities, thus enabling easy computation in applications. Average EV for price-rise equals the change in average consumer-surplus and is smaller than average CV for a normal good. Point-identification fails for ordered choice if the unit-price is identical for all alternatives, thereby providing a connection to Hausman-Newey's (2013) partial identification results for the limiting case of continuous choice.

Authors: Bhattacharya, D

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2013-07-23
• Paper number: 669
• Keywords: unobserved heterogeneity; unrestricted heterogeneity; multinimial choice; compensating and equivalent variation; deadweight loss