A Unified Approach to Estimating Demand and Welfare
Stephen Redding and
David Weinstein ()
No 11421, CEPR Discussion Papers from C.E.P.R. Discussion Papers
The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers.
Keywords: consumer valuation bias; elasticity of substitution; new goods; price index; welfare (search for similar items in EconPapers)
JEL-codes: D11 D12 E01 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse, nep-mac, nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Working Paper: A Unified Approach to Estimating Demand and Welfare (2016)
Working Paper: A unified approach to estimating demand and welfare (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11421
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=11421
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().