How Many Households Does a CGE Model Need and How Should They Be Disaggregated?

Martín Cicowiez, Hans Lofgren and Pamela Escobar

No 332827, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: In this paper we analyze how the impact of shocks (in terms of changes in aggregate welfare, poverty, size distribution on income, and functional distribution of income) are influenced by the number of representative households (RHs) that are included and the criteria according to which they are disaggregated (“strategically” on the basis of sources of income or, alternatively, on the basis of levels of per-capita income or consumption). By varying the number of production factors, it also tests the sensitivity of the results to the functional disaggregation. The hypotheses are that (a) starting from a single RH, initial increases in the number of RHs has a strong impact on the results when the disaggregation is strategic but that the impact quite soon becomes miniscule; (b) the larger the number of income sources, the larger the payoffs from household disaggregation; and (c) there is a sharp contrast between the results from disaggregation by quantile and strategic disaggregation, reflecting more limited sensitivity to changes in the functional distribution when households are disaggregated on the basis of per-capita incomes. In short, it is hypothesized that there is a strong case for strategic disaggregation of households and that the payoffs from fine household disaggregation are limited. To study these issues, we built a simple static CGE model that works with alternative disaggregations of households and income sources. Specifically, our CGE model is applied to several variants – in terms of factor and/or household disaggregation – of a 2011 dataset for Guatemala. In its most disaggregated form, the dataset has 8 factors (unskilled salaried labor, skilled salaried labor, unskilled non-salaried labor, skilled non-salaried labor, capital, land, and two other natural resources), 24 sectors, and 13,100 households. In addition, households receive transfer incomes from the government and abroad

Keywords: Consumer/Household Economics; Research Methods/Statistical Methods (search for similar items in EconPapers)
Date: 2017
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