Abstract
Except for a knife-edge case of preferences, the percentage error from using the change in expected consumer's surplus (ECS) to approximate the willingness to pay for a change in the distribution of a random price is unbounded, in contrast to Willig's (Am Econ Rev 66:589-597; 1976) famous approximation result for nonrandom prices. If the change is smooth on the space of random variables, and either the initial price is nonrandom or state-contingent payments are possible, then the change in ECS locally approximates the willingness to pay well. Unfortunately, this smoothness fails in some important applications.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 127-155 |
| Number of pages | 29 |
| Journal | Economic Theory |
| Volume | 34 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2008 |
Keywords
- Expected consumer's surplus
- Local cost-benefit analysis
- Uncertainty
- Welfare
ASJC Scopus subject areas
- Economics and Econometrics
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