In practice, complete demand systems are not estimated. Rather, either an incomplete demand system is estimated, or separability is invoked and a partial demand system is estimated. This paper considers the relationship between the conventional compensating variation (equivalent variation) and the corresponding welfare measure that can be derived from a partial demand system and the current budget allocation to the separable group. Even assuming the separability assumption invoked is appropriate, these partial measures provide, in general, only a limited amount of information about the compensating variation and no information about the equivalent variation. Great care is therefore needed when using partial welfare measures to evaluate policy.
ASJC Scopus subject areas
- Economics and Econometrics
- Management, Monitoring, Policy and Law