Loss aversion and the welfare ranking of policy interventions

Sergio Firpo, Antonio Galvao, Martyna Kobus, Thomas Parker and Pedro Rosa-Dias

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Abstract: This paper develops theoretical criteria and econometric methods to rank policy interventions in terms of welfare when individuals are loss-averse. Our new criterion for "loss aversion-sensitive dominance" defines a weak partial ordering of the distributions of policy-induced gains and losses. It applies to the class of welfare functions which model individual preferences with non-decreasing and loss-averse attitudes towards changes in outcomes. We also develop new statistical methods to test loss aversion-sensitive dominance in practice, using nonparametric plug-in estimates; these allow inference to be conducted through a special resampling procedure. Since point-identification of the distribution of policy-induced gains and losses may require strong assumptions, we extend our comparison criteria, test statistics, and resampling procedures to the partially-identified case. We illustrate our methods with a simple empirical application to the welfare comparison of alternative income support programs in the US.

Date: 2020-04, Revised 2023-09
New Economics Papers: this item is included in nep-ecm and nep-upt
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http://arxiv.org/pdf/2004.08468 Latest version (application/pdf)

Related works:
Working Paper: Loss Aversion and the Welfare Ranking of Policy Interventions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2004.08468

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