Hicksian Welfare Measures and the Normative Endowment Effect

We show that the Hicksian welfare measures of compensating variation and equivalent variation coincide if one of them is evaluated at a compensated income. The measures are nondecreasing in income if the varied attribute and income are complementary, and indirect utility is concave in income. Income monotonicity implies the normative endowment effect, where the equivalent variation exceeds the compensating variation. We provide sufficient conditions for the normative endowment effect and discuss empirical implications. In the global absence of a strict (anti-) endowment effect, both Hicksian welfare measures must be independent of income and the indirect utility function additively separable in income.

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American Economic Journal: Microeconomics, 2, 4, 171-194

 Record created 2013-07-12, last modified 2018-12-03

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