Applied Welfare Economics with Discrete Choice Models in the Presence of Income Effects

This paper describes how Small & Rosen’s 1981 paper in Econometrica has played an influential role in promoting the application of discrete choice models to the welfare analysis of public policy interventions. This paper reviewed the theoretical basis of Small & Rosen, with a view of strengthening practical advice. The paper found that Small & Rosen’s welfare measure is applicable only to demand problems not subject to income effects, and where the specification of deterministic utility observes four requirements: (i) for each alternative, equivalence (in absolute terms) between the conditional marginal utilities of income and price; (ii) common conditional marginal utility of income across alternatives; (iii) common conditional marginal utility of price across alternatives; and (iv) independence of the conditional marginal utility of income from prices. Arising from the above findings, it becomes clear that, where income effects are prevalent and/or the specification requirements are not observed, Small & Rosen’s welfare measure is inappropriate. The author’s submission to the European Transport Conference (ETC) in 2011 is motivated by an interest in exploring the theory behind welfare measures in the presence of income effects and especially its implications for the practical specification of discrete choice models.

• Record URL:
  https://aetransport.org/past-etc-papers/conference-papers-pre-2009/conference-papers-2010
• Corporate Authors:

  Association for European Transport (AET)

  1 Vernon Mews, Vernon Street, West Kensington
  London W14 0RL,    
• Authors:
  • Batley, R
  • Ibanez, J
• Conference:
  • European Transport Conference, 2010
  • Location: Glasgow Scotland, United Kingdom
  • Date: 2010-10-11 to 2010-10-13
• Publication Date: 2010

Language

• English

Media Info

• Media Type: Digital/other
• Pagination: v.p.
• Monograph Title: European Transport Conference, 2010 Proceedings

Subject/Index Terms

• TRT Terms: Choice models; Equilibrium (Economics); Income; Prices; Traffic equivalence factor; Welfare economics
• Uncontrolled Terms: Discrete choice models; Marginal utility
• Subject Areas: Planning and Forecasting; Society; Transportation (General); I72: Traffic and Transport Planning;

Filing Info

• Accession Number: 01353837
• Record Type: Publication
• Files: TRIS
• Created Date: Oct 19 2011 12:52PM