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Loss aversion and the welfare ranking of policy interventions

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Listed:
  • Firpo, Sergio
  • Galvao, Antonio F.
  • Kobus, Martyna
  • Parker, Thomas
  • Rosa-Dias, Pedro

Abstract

This paper develops theoretical criteria and econometric methods to rank policy interventions in terms of welfare when individuals are loss-averse. Our new criterion for “loss aversion-sensitive dominance” defines a weak partial ordering of the distributions of policy-induced gains and losses. It applies to the class of welfare functions which model individual preferences with non-decreasing and loss-averse attitudes towards changes in outcomes. We also develop new semiparametric statistical methods to test loss aversion-sensitive dominance in practice, using nonparametric plug-in estimates; these allow inference to be conducted through a special resampling procedure. Since point-identification of the distribution of policy-induced gains and losses may require strong assumptions, we extend our comparison criteria, test statistics, and resampling procedures to the partially-identified case. We illustrate our methods with a simple empirical application to the welfare comparison of alternative income support programs in the US.

Suggested Citation

  • Firpo, Sergio & Galvao, Antonio F. & Kobus, Martyna & Parker, Thomas & Rosa-Dias, Pedro, 2025. "Loss aversion and the welfare ranking of policy interventions," Journal of Econometrics, Elsevier, vol. 252(PB).
    • Handle: RePEc:eee:econom:v:252:y:2025:i:pb:s0304407623003597
    DOI: 10.1016/j.jeconom.2023.105643
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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