On the need to compensate the compensating variation in CGE modeling

Guerra, Ana Isabel; Sancho, Ferrán

doi:10.1080/09535314.2017.1372371

Cited by 5 publications

(1 citation statement)

References 14 publications

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“…A third reason for preferring EV over CV is provided by Guerra and Sancho (2018), who show by means of a numerical example in the framework of the CD utility function that in case of a calibrated CGE model EV is not sensitive to the choice of the numeraire so that, contrarily to CV, it needs no correction. In SI-A5 and SI-B5 we prove mathematically that the EV of LES and IAS are independent of this choice.…”

Section: Equivalent Variationmentioning

confidence: 99%

Consumer preferences in CGE models when data are scarce: comparing the linear expenditure and the indirect addilog systems

Boer

Daal

Rodrigues

2021

Economic Systems Research

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The linear expenditure system (LES) is a popular option for modeling consumer preferences in computable general equilibrium (CGE) models when data are scarce, since its underlying functional form is parsimonious in parameters. The goal of this paper is to compare the performance of LES against the indirect addilog system (IAS), a hardly known alternative, in terms of their theoretical properties and in a case study. Both systems are equally easy to implement and require the same information for parameter calibration. IAS, however, offers a richer description of consumer preferences. On the basis of an expenditure survey of Statistics Palestine in 1998, we find overwhelming statistical evidence that the IAS demand equations perform better than those of the LES. Simulations with a CGE model developed for disaster impact analysis applied to the intifada of the early 2000s show that the absolute value of the equivalent variation is larger for IAS than for LES.

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Section: Equivalent Variationmentioning

confidence: 99%

Consumer preferences in CGE models when data are scarce: comparing the linear expenditure and the indirect addilog systems

Boer

Daal

Rodrigues

2021

Economic Systems Research

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The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages

Sancho

2020

Environ Econ Policy Stud

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Eco-taxation is the preferred market based tool for achieving mitigation of CO 2 emissions and fostering sustainability. It works through tax-induced changes in the price of polluting activities while ideally transferring the environmental cost to emitters and users. The initial eco-tax signaling is transmitted and further amplified to the rest of the economy through the structure of cost interactions. In particular, real-world economies work under wage adjustment rules that reflect downward rigidity in labor costs when facing rising prices. These common rules may in fact affect the mitigation capacity of the eco-tax policies. We study this issue using an interindustry model in which we overcome the classical dichotomy between prices and quantities thanks to the novelty of connecting consumption demand with the changes in private income levels that would follow from the enacted eco-tax. We isolate income effects by keeping the given productive structure of the economy as unaltered as possible. In this sense, the proposed model has a bit of a neo-ricardian flavor. We implement the model and check the mitigation effectiveness of two different eco-tax policies using recent tabular data for the Spanish economy in 2015. The main conclusion is that we would not observe double benefits, even when all eco-tax collections are recycled back into the economy.

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The true index of cost of living under general equilibrium: The numéraire matters

2018

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On the need to compensate the compensating variation in CGE modeling

Cited by 5 publications

References 14 publications

Consumer preferences in CGE models when data are scarce: comparing the linear expenditure and the indirect addilog systems

Consumer preferences in CGE models when data are scarce: comparing the linear expenditure and the indirect addilog systems

The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages

The true index of cost of living under general equilibrium: The numéraire matters

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