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Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods

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  • Chetty, Nadarajan

Abstract

The debate between structural and reduced-form approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reduced-form strategies—transparent and credible identification—with an important advantage of structural models—the ability to make predictions about counterfactual outcomes and welfare. This literature has developed formulas for the welfare consequences of various policies that are functions of reduced-form elasticities rather than structural primitives. I present a general framework that shows how many policy questions can be answered by estimating a small set of sufficient statistics using program-evaluation methods. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss problems in macroeconomics, labor, development, and industrial organization that could be tackled using the sufficient statistic approach.

Suggested Citation

  • Chetty, Nadarajan, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Scholarly Articles 9748528, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:9748528
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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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