Nonparametric estimation of a compensating variation : the cost of disability

HANCOCK, Ruth
MORCIANO, Marcello
PUDNEY, Stephen
Publication Date 
December 2013
45 p

This paper proposes a nonparametric matching approach to estimation of implicit costs based on the compensating variation (CV) principle. The paper aims to introduce the matching approach, compare its properties with those of the conventional indirect parametric approach, and demonstrate its application in an important policy area. The authors apply the method to estimate the additional personal costs experienced by disabled older people in Great Britain, finding that those costs are substantial, averaging in the range £48-61 a week, compared with the mean level of state disability benefit (£28) or total public support (£47) received. Estimated costs rise strongly with the severity of disability. The authors compare the nonparametric approach with the standard parametric method, finding that the latter tends to generate large overestimates unless conditions are ideal, and recommend the nonparametric approach

ISER Working Paper Series, No. 2013-26

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