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The Policy Elasticity

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  • Nathaniel Hendren

Abstract

This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, I term them policy elasticities, to distinguish them from Hicksian and Marshallian elasticities. The model also formally justifies a simple benefit-cost ratio for non-budget neutral policies. Using existing causal estimates, I apply the framework to five policy changes: top income tax rate, EITC generosity, food stamps, job training, and housing vouchers.

Suggested Citation

  • Nathaniel Hendren, 2013. "The Policy Elasticity," NBER Working Papers 19177, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19177
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    References listed on IDEAS

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    1. Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.
    2. Eissa, Nada & Hoynes, Hilary, 2011. "Redistribution and Tax Expenditures: The Earned Income Tax Credit," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 689-729, June.
    3. Eissa, Nada & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2008. "Evaluation of four tax reforms in the United States: Labor supply and welfare effects for single mothers," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 795-816, April.
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    Cited by:

    1. Juan Carlos Suárez Serrato & Owen Zidar, 2016. "Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 106(9), pages 2582-2624, September.
    2. Wei Huang & Xiaoyan Lei & Yaohui Zhao, 2016. "One-Child Policy and the Rise of Man-Made Twins," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 467-476, July.
    3. Lawson, Nicholas, 2015. "Social program substitution and optimal policy," Labour Economics, Elsevier, vol. 37(C), pages 13-27.
    4. Raj Chetty & Nathaniel Hendren & Lawrence F. Katz, 2016. "The Effects of Exposure to Better Neighborhoods on Children: New Evidence from the Moving to Opportunity Experiment," American Economic Review, American Economic Association, vol. 106(4), pages 855-902, April.
    5. Eric Bettinger & Michael Kremer & Maurice Kugler & Carlos Medina & Christian Posso & Juan E. Saavedra, 2019. "School Vouchers, Labor Markets and Vocational Education," Borradores de Economia 1087, Banco de la Republica de Colombia.
    6. Arash Nekoei & Andrea Weber, 2017. "Does Extending Unemployment Benefits Improve Job Quality?," American Economic Review, American Economic Association, vol. 107(2), pages 527-561, February.
    7. Jacob Fishman & V. Kerry Smith, 2017. "Latent Tastes, Incomplete Stratification, and the Plausibility of Vertical Sorting Models," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(2), pages 339-361, February.
    8. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    9. Jeffrey Clemens, 2016. "Redistribution through Minimum Wage Regulation: An Analysis of Program Linkages and Budgetary Spillovers," Tax Policy and the Economy, University of Chicago Press, vol. 30(1), pages 163-189.
    10. Stefanie Stantcheva, 2015. "Optimal Income, Education, and Bequest Taxes in an Intergenerational Model," NBER Working Papers 21177, National Bureau of Economic Research, Inc.
    11. Amy Finkelstein & Nathaniel Hendren, 2020. "Welfare Analysis Meets Causal Inference," NBER Working Papers 27640, National Bureau of Economic Research, Inc.
    12. Jacob Fishman & V. Kerry Smith, 2013. "A Direct Test of the "Explanation" for Incomplete Stratification in Vertical Sorting Models," NBER Working Papers 19387, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • H0 - Public Economics - - General
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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