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.
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I thank Hector Chade, Glenn Ellison, Peter Hammond, Manuel Santos, seminar participants at Arizona State, Stanford and Yale and participants of the Midwest Economic Theory meetings at Indiana University and the 2004 Summer Econometric Meetings for comments.
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Schlee, E.E. Expected consumer’s surplus as an approximate welfare measure. Economic Theory 34, 127–155 (2008). https://doi.org/10.1007/s00199-007-0210-2
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DOI: https://doi.org/10.1007/s00199-007-0210-2