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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
Compensating variation
Equivalent variation
Konüs index
Computable general equilibrium
33 - Economia
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4 p.
Working Paper
Universitat Autònoma de Barcelona. Unitat de Fonaments de l'Anàlisi Econòmica
Working papers;961.17

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