TITLE:
On Price and Income Effects in Discrete Choice Models
AUTHORS:
Paolo Delle Site
KEYWORDS:
Discrete Choice, Random Utility, Duality, Price Effects, Income Effects, Slutsky Equation
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.6,
June
25,
2014
ABSTRACT: We consider the
classical micro-economic foundation of discrete choice, additive random utility
models, with conditional utilities depending on expenditure on the numéraire.
We show that signs of own- and cross-price effects are identified on the basis
of the primal problem only, and Giffen behaviour is ruled out. For the translog
specification, we prove that the alternative with highest price behaves as
normal good, and the alternative with lowest price behaves as inferior good. We
establish conditions for equivalence between the primal and the dual problem.
We provide a discrete choice version of the Slutsky equation which, similarly to divisible goods, decomposes the own-price effect
into a substitution and an income effect.