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Computation of the Compensating Variation Within a Random Utility Model Using GAUSS Software

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DOI: 10.4236/me.2011.23041    4,255 Downloads   7,402 Views  

ABSTRACT

To evaluate a tax reform in terms of change in household welfare one possibility is to estimate the compen-sating variation using a suitable model to assess the change in the household utility. When a random utility model is used, the computation of compensating variation is not straightforward, particularly when utility is not linear in household income. It can be carried out using a methodology recently proposed in the literature. In this paper we describe a software instrument, implemented using GAUSS programming language for computing the compensating variation to evaluate the 1991 tax reform introduced in Norway. The program is flexible and adaptable to different tax systems and different reference years.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

M. Locatelli and S. Strøm, "Computation of the Compensating Variation Within a Random Utility Model Using GAUSS Software," Modern Economy, Vol. 2 No. 3, 2011, pp. 383-389. doi: 10.4236/me.2011.23041.

References

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[2] Locatelli M., and Str?m S., “Computation of the compensating variation within a random utility model using GAUSS software”, CHILD Working Paper n. 02/2006.
[3] Dagsvik, J. K. and Karlstr?m, A., “Compensating variation and Hicksian choice probabilities in random utility models that are non-linear in income”, Review of Economic Studies, Vol. 72, 2005, pp. 57-76. DOI: 10.1111/0034-6527.00324
[4] Aptech System, Inc., “GAUSS software (version 10)”, Black Diamond, WA 98010 USA, 2009.
[5] Dagsvik, J. K and Str?m, S., “Sectoral labor supply, choice restrictions and functional form”, Journal of Applied Econometrics, Vol.21 (6), 2005, pp. 803-826. DOI: 10.1002/jae.866
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