TITLE:
Computation of the Compensating Variation Within a Random Utility Model Using GAUSS Software
AUTHORS:
Marilena Locatelli, Steinar Strøm
KEYWORDS:
Compensating Variation, Gauss Application, Tax System Evaluation
JOURNAL NAME:
Modern Economy,
Vol.2 No.3,
July
27,
2011
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.