On Price and Income Effects in Discrete Choice Models

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.