IDEAS home Printed from https://ideas.repec.org/p/wrk/wcreta/84.html
   My bibliography  Save this paper

Robust Hicksian Welfare Analysis under Individual Heterogeneity

Author

Listed:
  • Maes, Sebastiaan

    (University of Antwerp)

  • Malhotra, Raghav

    (University of Leicester)

Abstract

Welfare e ects of price changes are often estimated with cross-sections ; these do not identify demand with heterogeneous consumers. We develop a theoretical method addressing this, utilizing uncompensated demand moments to construct local approximations for compensated demand moments, robust to unobserved preference heterogeneity. Our methodological contribution offers robust approximations for average and distributional welfare estimates, extending to price indices, taxable income elasticities, and general equilibrium welfare. Our methods apply to any cross-section; we demonstrate them via UK household budget survey data. We uncover an insight: simple non-parametric representative agent models might be less biased than complex parametric models accounting for heterogeneity.

Suggested Citation

  • Maes, Sebastiaan & Malhotra, Raghav, 2024. "Robust Hicksian Welfare Analysis under Individual Heterogeneity," CRETA Online Discussion Paper Series 84, Centre for Research in Economic Theory and its Applications CRETA.
    • Handle: RePEc:wrk:wcreta:84
    as

    Download full text from publisher

    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/creta/papers/manage/creta84_-_sebastian_maes.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael Jerison, 1994. "Optimal Income Distribution Rules and Representative Consumers," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 739-771.
    2. Edward E. Schlee, 2007. "Measuring Consumer Welfare With Mean Demands," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 869-899, August.
    3. Yuichi Kitamura & Jörg Stoye, 2018. "Nonparametric Analysis of Random Utility Models," Econometrica, Econometric Society, vol. 86(6), pages 1883-1909, November.
    4. David Atkin & Benjamin Faber & Thibault Fally & Marco Gonzalez-Navarro, 2020. "Measuring Welfare and Inequality with Incomplete Price Information," NBER Working Papers 26890, National Bureau of Economic Research, Inc.
    5. Dirk Bergemann & Alessandro Bonatti & Tan Gan, 2022. "The economics of social data," RAND Journal of Economics, RAND Corporation, vol. 53(2), pages 263-296, June.
    6. Jerry A. Hausman & Whitney K. Newey, 2016. "Individual Heterogeneity and Average Welfare," Econometrica, Econometric Society, vol. 84, pages 1225-1248, May.
    7. Hoderlein, Stefan, 2011. "How many consumers are rational?," Journal of Econometrics, Elsevier, vol. 164(2), pages 294-309, October.
    8. Sam Cosaert & Thomas Demuynck, 2018. "Nonparametric Welfare and Demand Analysis with Unobserved Individual Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 349-361, May.
    9. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    10. Jose Apesteguia & Miguel A. Ballester, 2015. "A Measure of Rationality and Welfare," Journal of Political Economy, University of Chicago Press, vol. 123(6), pages 1278-1310.
    11. Richard W. Blundell & Martin Browning & Ian A. Crawford, 2003. "Nonparametric Engel Curves and Revealed Preference," Econometrica, Econometric Society, vol. 71(1), pages 205-240, January.
    12. Pablo D. Fajgelbaum & Amit K. Khandelwal, 2016. "Measuring the Unequal Gains from Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1113-1180.
    13. Stefan Hoderlein & Enno Mammen, 2007. "Identification of Marginal Effects in Nonseparable Models Without Monotonicity," Econometrica, Econometric Society, vol. 75(5), pages 1513-1518, September.
    14. Henrik J. Kleven, 2021. "Sufficient Statistics Revisited," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 515-538, August.
    15. André Palma & Karim Kilani, 2011. "Transition choice probabilities and welfare analysis in additive random utility models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(3), pages 427-454, April.
    16. Michal Paluch & Alois Kneip & Werner Hildenbrand, 2012. "Individual Versus Aggregate Income Elasticities For Heterogeneous Populations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(5), pages 847-869, August.
    17. Richard Blundell & Martin Browning & Ian Crawford, 2008. "Best Nonparametric Bounds on Demand Responses," Econometrica, Econometric Society, vol. 76(6), pages 1227-1262, November.
    18. Debopam Bhattacharya, 2015. "Nonparametric Welfare Analysis for Discrete Choice," Econometrica, Econometric Society, vol. 83, pages 617-649, March.
    19. Richard Blundell & Rosa L. Matzkin, 2014. "Control functions in nonseparable simultaneous equations models," Quantitative Economics, Econometric Society, vol. 5, pages 271-295, July.
    20. Foster, Andrew & Hahn, Jinyong, 2000. "A consistent semiparametric estimation of the consumer surplus distribution," Economics Letters, Elsevier, vol. 69(3), pages 245-251, December.
    21. Roy Allen & John Rehbeck, 2019. "Identification With Additively Separable Heterogeneity," Econometrica, Econometric Society, vol. 87(3), pages 1021-1054, May.
    22. Dirk Bergemann & Alessandro Bonatti, 2019. "Markets for Information: An Introduction," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 85-107, August.
    23. Sören Blomquist & Whitney K. Newey & Anil Kumar & Che-Yuan Liang, 2021. "On Bunching and Identification of the Taxable Income Elasticity," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2320-2343.
    24. Aguiar, Victor H. & Serrano, Roberto, 2017. "Slutsky matrix norms: The size, classification, and comparative statics of bounded rationality," Journal of Economic Theory, Elsevier, vol. 172(C), pages 163-201.
    25. Arthur Lewbel, 2001. "Demand Systems with and without Errors," American Economic Review, American Economic Association, vol. 91(3), pages 611-618, June.
    26. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-1476, November.
    27. John K. Dagsvik & Anders Karlström, 2005. "Compensating Variation and Hicksian Choice Probabilities in Random Utility Models that are Nonlinear in Income," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 57-76.
    28. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Decembrie.
    29. Arthur Lewbel & Krishna Pendakur, 2009. "Tricks with Hicks: The EASI Demand System," American Economic Review, American Economic Association, vol. 99(3), pages 827-863, June.
    30. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    31. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sebastiaan Maes & Raghav Malhotra, 2023. "Robust Hicksian Welfare Analysis under Individual Heterogeneity," Papers 2303.01231, arXiv.org, revised Nov 2023.
    2. Sam Cosaert & Thomas Demuynck, 2018. "Nonparametric Welfare and Demand Analysis with Unobserved Individual Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 349-361, May.
    3. Arthur Lewbel & Krishna Pendakur, 2017. "Unobserved Preference Heterogeneity in Demand Using Generalized Random Coefficients," Journal of Political Economy, University of Chicago Press, vol. 125(4), pages 1100-1148.
    4. Cherchye, Laurens & Demuynck, Thomas & Rock, Bram De, 2019. "Bounding counterfactual demand with unobserved heterogeneity and endogenous expenditures," Journal of Econometrics, Elsevier, vol. 211(2), pages 483-506.
    5. Dette, Holger & Hoderlein, Stefan & Neumeyer, Natalie, 2016. "Testing multivariate economic restrictions using quantiles: The example of Slutsky negative semidefiniteness," Journal of Econometrics, Elsevier, vol. 191(1), pages 129-144.
    6. Thomas Demuynck, 2018. "Testing the homogeneous marginal utility of income assumption," Econometric Reviews, Taylor & Francis Journals, vol. 37(10), pages 1120-1136, November.
    7. Jerry A. Hausman & Whitney K. Newey, 2016. "Individual Heterogeneity and Average Welfare," Econometrica, Econometric Society, vol. 84, pages 1225-1248, May.
    8. Stefan Hoderlein & Jörg Stoye, 2015. "Testing stochastic rationality and predicting stochastic demand: the case of two goods," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 313-328, October.
    9. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2023. "Nonparametric Models in Consumer Behaviour," Working Papers ECARES 2023-04, ULB -- Universite Libre de Bruxelles.
    10. Rachel Griffith & Lars Nesheim & Martin O'Connell, 2018. "Income effects and the welfare consequences of tax in differentiated product oligopoly," Quantitative Economics, Econometric Society, vol. 9(1), pages 305-341, March.
    11. Hoderlein, Stefan & Holzmann, Hajo & Meister, Alexander, 2017. "The triangular model with random coefficients," Journal of Econometrics, Elsevier, vol. 201(1), pages 144-169.
    12. Maes, Sebastiaan & Malhotra, Raghav, 2024. "Beyond the Mean : Testing Consumer Rationality through Higher Moments of Demand," CRETA Online Discussion Paper Series 85, Centre for Research in Economic Theory and its Applications CRETA.
    13. Demuynck, T., 2015. "The homogeneous marginal utility of income assumption," Research Memorandum 013, Maastricht University, Graduate School of Business and Economics (GSBE).
    14. Debopam Bhattacharya, 2021. "The Empirical Content of Binary Choice Models," Econometrica, Econometric Society, vol. 89(1), pages 457-474, January.
    15. Victor Chernozhukov & Jerry Hausman & Whitney K. Newey, 2019. "Demand analysis with many prices," CeMMAP working papers CWP59/19, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    16. Bart Capéau & Liebrecht De Sadeleer & Sebastiaan Maes & André Decoster, 2020. "Nonparametric welfare analysis for discrete choice: levels and differences of individual and social welfare," Working Papers of Department of Economics, Leuven 674666, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    17. Hubner, Stefan, 2023. "Identification of unobserved distribution factors and preferences in the collective household model," Journal of Econometrics, Elsevier, vol. 234(1), pages 301-326.
    18. Yuichi Kitamura & Jörg Stoye, 2018. "Nonparametric Analysis of Random Utility Models," Econometrica, Econometric Society, vol. 86(6), pages 1883-1909, November.
    19. Laurens CHERCHYE & Ian CRAWFORD & Bram DE ROCK & Frederic VERMEULEN, 2011. "Aggregation without the aggravation? Nonparametric analysis of the representative consumer," Working Papers of Department of Economics, Leuven ces11.36, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    20. Laurens CHERCHYE & Ian CRAWFORD & Bram DE ROCK & Frederic VERMEULEN, 2013. "Gorman revisited: nonparametric conditions for exact linear aggregation," Working Papers of Department of Economics, Leuven ces13.05, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.

    More about this item

    Keywords

    nonparametric welfare analysis ; individual heterogeneity ; Hicksian demand ; compensating variation ; exact consumer surplus ; deadweight loss ; price indices JEL codes: C14 ; C31 ; D11 ; D12 ; D63 ; H22 ; I31;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wrk:wcreta:84. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Margaret Nash (email available below). General contact details of provider: https://edirc.repec.org/data/dewaruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.