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Identifying the Distribution of Welfare from Discrete Choice

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  • Bart Cap'eau
  • Liebrecht De Sadeleer
  • Sebastiaan Maes

Abstract

Empirical welfare analyses often impose stringent parametric assumptions on individuals' preferences and neglect unobserved preference heterogeneity. We develop a framework to conduct individual and social welfare analysis for discrete choice that does not suffer from these drawbacks. We first adapt the class of individual welfare measures introduced by Fleurbaey (2009) to settings where individual choice is discrete. Allowing for unrestricted, unobserved preference heterogeneity, these measures become random variables. We then demonstrate that their distribution can be derived from choice probabilities, which can be estimated nonparametrically from cross-sectional data. Additionally, we derive nonparametric results for the joint distribution of welfare and welfare differences, and for social welfare. The former is an important tool in determining whether the winners of a price change belong disproportionately to those groups who were initially well-off.

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  • Bart Cap'eau & Liebrecht De Sadeleer & Sebastiaan Maes, 2023. "Identifying the Distribution of Welfare from Discrete Choice," Papers 2303.02645, arXiv.org, revised May 2025.
    • Handle: RePEc:arx:papers:2303.02645
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    References listed on IDEAS

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    1. Dixit, Avinash, 1975. "Welfare effects of tax and price changes," Journal of Public Economics, Elsevier, vol. 4(2), pages 103-123, February.
    2. Debopam Bhattacharya, 2015. "Nonparametric Welfare Analysis for Discrete Choice," Econometrica, Econometric Society, vol. 83, pages 617-649, March.
    3. John K. Dagsvik, 2002. "Discrete Choice in Continuous Time: Implications of an Intertemporal Version of the Iia Property," Econometrica, Econometric Society, vol. 70(2), pages 817-831, March.
    4. 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.
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