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Random utility models are widely used to study consumer choice. The vast majority of applications make strong assumptions about the marginal utility of income, which restricts income effects, demand curvature and pass-through. We show that flexibly modeling income effects can be important, particularly if one is interested in the distributional effects of a policy change, even in a market in which, a priori, the expectation is that income effects will play a limited role. We allow for much more flexible forms of income effects than is common and we illustrate the implications by simulating the introduction of an excise tax.
Supplementary material for this paper is available here.
Authors
CPP Co-Director, IFS Research Director
Rachel is Research Director and Professor at the University of Manchester. She was made a Dame for services to economic policy and education in 2021.
cemmap co-Director University College London
Lars Nesheim is a Professor of Economics at UCL and Co-Director of the Centre for Microdata Methods and Practice (cemmap).
Research Fellow University of Wisconsin
Martin, previously Deputy Research Director, is a Research Fellow at IFS and Professor of Economics at the University of Wisconsin.
Working Paper details
- DOI
- 10.1920/wp.cem.2015.2315
- Publisher
- Institute for Fiscal Studies
Suggested citation
R, Griffith and L, Nesheim and M, O'Connell. (2015). Income effects and the welfare consequences of tax in differentiated product oligopoly. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/income-effects-and-welfare-consequences-tax-differentiated-product-oligopoly (accessed: 28 March 2024).
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