Compensated Demand Functions Research Articles

Health care switching behaviour of the patients in Nepal: an ordered logit model analysis

Analysis of health care utilization is becoming ever more difficult as consumer preferences change rapidly and the health care market becomes more complex. A number of studies primarily focused on demand for health care with first consultation of health care providers; however, the consumers have made several visits to the providers without referral from the first provider. The paper utilizes the ordered logit model in compensated demand function with example of Kala Azar (KA) care to understand the demand for health care in switching behaviour of the consumer. The individuals have adopted switching behaviour to minimize the cost of health care; however, due to the treatment failure; the total cost of care has increased with number of visits. Information and service obtaining costs have robustly determined the switching behaviour. The total cost of health care increases with the increase in events of switching behaviour that reduces the economic welfare of the household. The demand analysis of health care, which captures the multiple care seeking events, is appropriate for producing better information for policy maker.DOI: http://dx.doi.org/10.3126/ejdi.v15i1-2.11871Economic Journal of Development Issues Vol. 15 & 16 No. 1-2, p. 128-147

Optimal Consumption under Uncertainties: Random Horizon Stochastic Dynamic Roy’s Identity and Slutsky Equation

This paper extends Slutsky’s classic work on consumer theory to a random horizon stochastic dynamic framework in which the consumer has an inter-temporal planning horizon with uncertainties in future incomes and life span. Utility maximization leading to a set of ordinary wealth-dependent demand functions is performed. A dual problem is set up to derive the wealth compensated demand functions. This represents the first time that wealth-dependent ordinary demand functions and wealth compensated demand functions are obtained under these uncertainties. The corresponding Roy’s identity relationships and a set of random horizon stochastic dynamic Slutsky equations are then derived. The extension incorporates realistic characteristics in consumer theory and advances the conventional microeconomic study on consumption to a more realistic optimal control framework.

Consumer's Surplus Without Computer

Compensated demand functions are useful tools to calculate and manipulate not only equivalent and compensating variations, but also ordinary demand functions. As a bonus I will show that the CES utility function admits welfare analysis without computer aid, contrary to the suggestion of Tohamy and Wilson Mixon (2004).

Compensating variation consumer's surplus via succesive approximations

Many economists agree that the best measure of consumer's surplus is the compensating Variation Consumer's surplus (CVCS). Howerver, Because the compensated demand function is not observable, there are problems in using this measure in emperical applications. There are ways around this limitations that work well under certain circumstances, However, until now there has been no solution that always works well. We introduce a sucessive approximations method of calculating compensating variation consumer’s surplus using data from the ordinary demand curve. In doing so we numerically identify the compensated demand fuction over the price interval involved. This procedure can be made extremely ‘small’. We also use our method to calculate CVCS for three applications in the literature where Marshallian surplus was reported.

On Shephard's Lemma and the continuity of compensated demand functions

In this paper Shephard's Lemma will be proved under very weak conditions. Neither the differentiability of the cost function nor the transitivity and completeness of the underlying preferences will be assumed.

Housing demand properties in the monocentric market form

Individual compensated demand functions must satisfy well-known properties: negative own- price effects and symmetric cross-price effects. This paper reexamines these properties for goods like housing, the prices of which vary within spatial market areas, and demonstrates how compensated demand properties must be modified to take into account the effects of endogenous location choice. It also derives Slutsky equations for both location and housing demands and applies these relationships with existing empirical estimates to evaluate the size of the compensated housing demand own-price effect with endogenous location.

A reformulation of the theory of demand by compensated demand functions

We present a formal approach to consumer demand by compensated demand functions. In accordance with the integrability theory or with the theory of revealed preference, we do not require the existence of a utility function, but we do assume certain hypotheses concerning functions describing rational behavior. In view of their properties, these functions can be interpreted as compensated demand functions. According to traditional neoclassical consumer theory, Shephard's lemma and the symmetry and negative semidefiniteness of the Slutsky-Hicks matrix can be shown. We shall also see that a convex, continuous, and monotonic preference ordering, which is representable by income compensation functions, can be introduced. It can also be shown that the existence of a compensated equilibrium can be derived within this approach by compensated demand functions. In order to obtain the existence of a compensated equilibrium under less stringent conditions we finally generalize the axioms assuming that a compensated demand correspondence is given.

Implications of endogenous prices in consumer theory: The case of barter and the consumer cooperative

In contrast to the neoclassical model of the consumer, we develop a model in which the consumer can affect the price paid for goods through a barter system. The model is motivated via the consumer cooperative. We show that the compensated demand functions for co-op goods do not necessarily slope down in their own shelf price. A natural rescaling of the bundle of goods, however, obeys the law of demand and points to the relevant demand functions in situations of barter. The comparative static properties of the model are summarized in a generalized Slutsky matrix.

The welfare cost of housing standards: Theory with application to Jakarta

Housing standards are likely to impose quantity constraints on the consumption possibilities of the poor. This paper shows how an exact money metric of the welfare loss from such standards can be derived for any well-behaved preference ordering. Recent results from the theory of consumer behavior under rationing permit the cost of standards to be interpreted in terms of the compensated demand function for the standardized good. A housing demand function for the poor in Jakarta is estimated using household level data and is used to calculate numerically the cost to them of introducing uniformly binding housing standards at unsubsidized prices. Estimates are also presented of the rate of price subsidy on housing needed for compensation.

Randomization of commodity taxes: An expenditure minimization approach

Using an expenditure minimization approach, necessary and sufficient conditions for local random taxation are obtained in terms of the curvature of the compensated demand function, so that intuition from excess burden analysis can be applied. Major findings include: (1) random taxation is locally optimal if the compensated demand function is sufficiently convex; (2) horizontally equitable taxation is locally optimal if the compensated demand function is concave, and (3) local randomization is not optimal if the tax revenue requirement is sufficiently close to zero or to any local maximum. We also derive an inverse elasticity characterization of the optimal random tax structure.

Derivation of Slutsky Compensated Demand Functions

Derivation of Slutsky Compensated Demand Functions

A note on the marginal benefits and efficiency of goods provided by local government

This paper focuses on the specification error found in many of the empirical studies dealing with the economic efficiency of local government in providing goods such as education. The paper argues that the compensated demand function—rather than the ordinary demand function—should be used in order to derive the marginal benefits of a given good. The ordinary demand functions used in previous studies would lead to inflated estimates of the marginal benefits and, therefore, to inaccurate empirical results. The paper presents a compensated demand function derived from a linear expenditure demand system. Using public education as an example, it demonstrates how such a statistically unobservable compensated demand function can be used to produce correct measurements of marginal benefits of a public service provided by local government. The results of the investigation into the efficiency aspects of public education will also be discussed.

Duality results in demand theory

Four results in demand theory are considerd: the Ville Roy Identity, the Hoteling Wold Identity, the Shephard Lemma, and the Shephard-Hanoch Lemma. It is shown how all four theorems can be stated using the same functional form and can be illustrated using the same graphical technique. Consideration is also given to the nature of the compensatid in movements along compensated and inverse compensated demand functions.

The Three Consumer's Surpluses

Recent years have seen a revival of interest in the concept of consumer's surplus. Among the new ideas and methods that have emerged, the use of the expenditure function is particuarly important. Diamond and McFadden (1974) show how it simplifies the discussion of Hicksian notions of the surplus based on compensated demand functions, viz. the compensating and equivalent variations. Seade (1976) and Willig (1976) show that in certain special cases, a simple function relation exists between these compensated surpluses and the conventional 'Marshallian' surplus defined using uncompensated or market demand functions. Willig introduces the ingenious idea of forgetting about the problem of the path-dependence of the Marshallian surplus by making it a convention to choose a particular path by a specified rule, and examines how well this surplus can approximate ont of the Hicksian surpluses. The purpose of this paper is complementary ; we show that the very conditions which make Marshallian surplus path - independent go a long way towards yielding bounds for it in terms of the Hicksian surpluses. (This abstract was borrowed from another version of this item.)

A Theory of Piecemeal Policy Recommendations

The theory of the second best, first formally presented by Lipsey and Lancaster [16], maintains that the abolition of an arbitrarily chosen distortion in an economy with multiple distortions may reduce the welfare of the economy. The main objective of the present paper is to formulate some piecemeal policy recommendations which would definitely result in a move towards efficiency. In particular, we will prove the following: (a) a policy which reduces all price distortions uniformly will improve the welfare of the economy, if it is stable in the Marshallian sense. (b) a policy which brings the highest distortion to the level of the next highest will improve the welfare of the economy, if the good with the highest distortion is substitutable for all the other goods and if the economy is stable in the Marshallian sense. Our results integrate the characterization of the second best solution by Green [9], the analysis of the uniform reduction of tariff and excise tax by Foster and Sonnenschein [8] and Bruno [4], and the demonstration by Kemp [15] that the welfare effect of the tariff reduction in the two commodity world is related to the stability of the economy. In the present paper, an extensive use of the compensated demand function enables us to reveal the underlying relationship among these seemingly unrelated works.' In Section 2, we will define the compensated demand function, and will present its properties used in this paper. The model will be presented in Section 3. In Section 4 we will establish that in an economy with constant-cost technology a uniform reduction in excise tax rates improves welfare provided that the aggregate of income terms weighted by marginal costs (AIM) is positive. We will also show that a reduction of the highest tax rate to the level of the next highest rate improves the welfare if the AIM is positive and if the good with the highest tax rate is substitutable for all other goods. In Section 5 the main theorems will be proved by establishing that the positivity of AIM in the propositions of Section 4 can be replaced by another condition if the economy is stable under the Marshallian adjustment mechanism (which is defined in the text). Section 6 will re-evaluate the theory of the second best from our framework. (This section can be read independently of Section 5.) Throughout this paper, a matrix will be denoted by an upper-case letter; a lower-case bold-faced letter will represent a column vector; its transpose will be shown by a prime; and the ith element of the vector is denoted by the same letter with subscript i, unless stated otherwise.