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Compensating the compensating variation
Guerra, Ana Isabel
Sancho, Ferran
The message of this note is that in a general equilibrium setting the compensating variation is numéraire dependent. In contrast, the equivalent variation is neutral regarding the choice of value units. We illustrate with a simple example and propose an even simpler solution to overcome this bias in the compensating variation; all that is required to have a correct welfare estimate is to compensate the compensating variation by normalization with a price index. This type of correction is necessary to overcome the often blind implementation of welfare measures in numerical general equilibrium
02-2017
Compensating variation
Equivalent variation
Konüs index
Computable general equilibrium
33 - Economia
Microeconomia
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4 p.
Document de treball
Universitat Autònoma de Barcelona. Unitat de Fonaments de l'Anàlisi Econòmica
Working papers;961.17
         

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