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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

#### A Note on the Second-order Approximation of Hicksian Welfare Change IndicatorsVol.21, No.1, March 2010, 68–82

English Version |  Korean Version
• #### Ki-Hong Choi   (National Pension Research Institute)

Abstract

In 1930-1940, Hicks defined the welfare change indicators such as the equivalent variation and the compensating variation using the expenditure function and provided their approximation formular using the Taylor expansion. The famous Harberger's welfare indicator is a second order approximation of the Hicksian welfare change indicators. Weitzman(1988) showed that a refinement is needed for the Harberger's welfare indicator based on the modern microeconomic theory. Also Diewert(1992) extended Weitzman's result by providing two refined formular. This note claims that conventional second order Taylor approximation is not a good method in case of the expenditure function as seen from the standard numerical analysis theory. This note derives four kinds of welfare change indicators succinct way using a variant of Taylor second order approximation. The two among the four are the same with Diewert's formulas.

Keywords
Expenditure function, Welfare change indicator, Second-order approximation

JEL classification codes
D11,D12