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American Economic Journal: Microeconomics: Vol. 2 No. 4 (November 2010)

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Hicksian Welfare Measures and the Normative Endowment Effect

Article Citation

Weber, Thomas A. 2010. "Hicksian Welfare Measures and the Normative Endowment Effect." American Economic Journal: Microeconomics, 2(4): 171-94.

DOI: 10.1257/mic.2.4.171

Abstract

We show that the Hicksian welfare measures of compensating variation and equivalent variation coincide if one of them is evaluated at a compensated income. The measures are nondecreasing in income if the varied attribute and income are complementary, and indirect utility is concave in income. Income monotonicity implies the normative endowment effect, where the equivalent variation exceeds the compensating variation. We provide sufficient conditions for the normative endowment effect and discuss empirical implications. In the global absence of a strict (anti-) endowment effect, both Hicksian welfare measures must be independent of income and the indirect utility function additively separable in income. (JEL D11, D63)

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Authors

Weber, Thomas A. (Stanford U)

JEL Classifications

D11: Consumer Economics: Theory
D63: Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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