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Sufficient Statistics for Measuring Forward-Looking Welfare

Author

Listed:
  • David Baqaee
  • Ariel Burstein
  • Yasutaka Koike-Mori

Abstract

We propose a dynamic money-metric index of household welfare. Our approach hinges on two assumptions: (i) preferences are separable between the present and the future; and (ii) some households face no undiversifiable idiosyncratic risk. For this group, we infer the value of the future from consumption-saving behavior, translating future shocks into current-dollar equivalents. Others’ welfare is then pinned down by matching their budget shares. The method accommodates incomplete markets, lifecycle motives, non-rational expectations, and non-exponential discounting without specifying functional forms. Implementation needs only price series, repeated cross-sectional income-balance-sheet-spending data, and an estimate of the intertemporal-substitution elasticity. In simulations, our method tracks true welfare better than net-present-value calculations, especially under credit constraints. In the PSID, our dynamic index differs sharply from static measures. Our estimates can be used to study the dynamic welfare effect of different shocks, without enumerating and forecasting all the uncertain margins and time horizons along which the shock can have effects.

Suggested Citation

  • David Baqaee & Ariel Burstein & Yasutaka Koike-Mori, 2024. "Sufficient Statistics for Measuring Forward-Looking Welfare," NBER Working Papers 32567, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32567
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D0 - Microeconomics - - General
    • D10 - Microeconomics - - Household Behavior - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E0 - Macroeconomics and Monetary Economics - - General
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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