Prices and welfare: a comparative analysis of measures and computational methods

Abdelkrim Araar and Paolo Verme

Empirical Economics, 2019, vol. 57, issue 4, No 1, 1077-1101

Abstract: Abstract What is the welfare effect of a price change? The paper addresses this question by empirically comparing welfare measures and computational methods under different demand systems, parameters choices and price shocks. In the context of individual welfare and as a rule of thumb, welfare measures converge to approximately the same values for price changes below 10%. Above this threshold, these measures start to diverge significantly. Budget shares play an important role in explaining such divergence, whereas the choice of demand system has a minor role. These findings generally hold in the context of social welfare. Statistical inference and stochastic dominance help to refine results, particularly for the lower parts of the income distributions.

Keywords: Welfare measurements; Consumer surplus; Compensating Variation; Equivalent Variation; Laspeyres index; Paasche index; Demand systems (search for similar items in EconPapers)
JEL-codes: D11 D12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00181-018-1492-x

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