Nonparametric Welfare Analysis for Discrete Choice: Levels and Differences of Individual and Social Welfare

Bart Capéau, Liebrecht De Sadeleer, Sebastiaan Maes () and André Decoster

No 9071, CESifo Working Paper Series from CESifo

Abstract: Empirical welfare analyses often impose stringent parametric assumptions on individuals’ preferences and neglect unobserved preference heterogeneity. In this paper, we develop a framework to conduct individual and social welfare analysis for discrete choice that does not suffer from these drawbacks. We first adapt the broad class of individual welfare measures introduced by Fleurbaey (2009) to settings where individual choice is discrete. Allowing for unrestricted, unobserved preference heterogeneity, these measures become random variables. We then show that the distribution of these objects can be derived from choice probabilities, which can be estimated nonparametrically from cross-sectional data. In addition, we derive nonparametric results for the joint distribution of welfare and welfare differences, as well as for social welfare. The former is an important tool in determining whether those who benefit from a price change belong disproportionately to those who were initially well-off. An empirical application illustrates the methods.

Keywords: discrete choice; nonparametric welfare analysis; individual welfare; social welfare; money metric utility; compensating variation; equivalent variation (search for similar items in EconPapers)
JEL-codes: C14 C35 D12 D63 H22 I31 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dcm and nep-upt
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Working Paper: Nonparametric welfare analysis for discrete choice: levels and differences of individual and social welfare (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9071

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