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

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  • Raj Chetty

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 recent work has developed formulas for the welfare consequences of various policies that are functions of high-level elasticities rather than deep primitives. These formulas provide theoretical guidance for the measurement of treatment effects using program evaluation methods. I present a general framework that shows how many policy questions can be answered by identifying a small set of sufficient statistics. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss topics in labor economics, industrial organization, and macroeconomics that can be tackled using the sufficient statistic approach.

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  • Raj Chetty, 2008. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," NBER Working Papers 14399, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14399
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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • H0 - Public Economics - - General
    • J0 - Labor and Demographic Economics - - General
    • L0 - Industrial Organization - - General

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