Welfare Analysis When Budget Constraints Are Nonlinear: The Case of Flood Hazard Reduction

Nonlinear budget constraints occur when goods have a "quality" dimension or possess "characteristics" and the price of the composite good is a nonlinear function of its characteristics. Homogeneity is generally not characteristic of indirect utility functions and demand functions when budget constraints are nonlinear. In this situation, willingness to pay methods that impose homogeneity (or fail to impose restrictions implied by nonlinear budget constraints) on demands are inappropriate. A straightforward method of estimating willingness to pay when budget constraints are nonlinear implements a direct utility approach. Exact and biased welfare measures are obtained without integration.