Consumers care about variables that they cannot control, such as environmental quality. Welfare analysis involving these nonmarket goods, or "state preference variables," requires knowledge of consumer preference defined over the cross-product of these variables and commodity bundles. Such welfare issues arise in diverse areas such as environmental economics, price indices, industrial organization and behavioral economics. The problem is that revealed preference information is by itself useless for this welfare analysis.
The literature concerned with this problem is dominated by sophisticated applications of calculus. I instead rely on the algebraic properties of preference, such as transitivity, in combination with basic set theory. By stepping away from the calculus paradigm, I am able to obtain new results. In particular, with the modeling structure presented here we can state precisely what is and is not possible when revealed preference and supplemental preference information are brought together for welfare analysis with state preference variables. For example, we can determine exactly when additional preference information (such as in the form of a "preference restriction") is sufficient to determine a unique welfare measure and when this information can be tested against revealed preference.
Additional preference information (beyond revealed preference) is specified in terms of "reference sets" and "seed relations," from which we may obtain a complete preference relation sufficient for exact welfare analysis via a process called "preference generation." Reference set properties determine whether the additional preference information is insufficient, exactly sufficient, or perhaps redundant, thereby allowing it to be meaningfully tested against revealed preference. The modeling structure includes four distinct variations depending on whether the additional preference information is most naturally specified as a preference seed relation or indifference seed relation, and on whether it concerns commodity preference or price preference.
Potential applications are explored with a focus on weak complementarity, followed by shorter examples including two types of repackaging for price indices, a treatment of the new and disappearing goods problem, and an application of price preference generation with the principal Willig condition. Another preference-theoretic methodology is presented in an appendix demonstrating how "goodness" of a nonmarket good may be falsified with revealed preference.
|School:||University of California, Davis|
|School Location:||United States -- California|
|Source:||DAI-A 68/09, Dissertation Abstracts International|
|Keywords:||Nonmarket goods, Preference-theoretic modeling, Weak complementarity, Welfare analysis, Willig conditions|
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