Sufficient Statistics for Measuring Forward-Looking Welfare

David Baqaee, Ariel Tomas Burstein and Yasutaka Koike-Mori

No 19263, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide a method to measure welfare, in money-metric terms, taking into account expectations about the future. Our two key assumptions are that (1) the expenditure function is separable between the present and the future, and (2) there are some households that do not face idiosyncratic undiversifiable risk. Our sufficient statistics methodology allows for incomplete markets, lifecycle motives, non-rational expectations, non-exponential time discounting, and arbitrary functional forms. To apply our formulas, we require estimates of the elasticity of intertemporal substitution, goods and services’ prices over time, and repeated cross-sectional information on households’ income, balance sheets, and expenditures. We illustrate our method using the PSID from the United States. We find that static measures overstate cost-of-living increases for most households, particularly younger and poorer households. Our estimates can be used to study the welfare consequences of dynamic stochastic shocks that affect households along different margins and time horizons. For example, we find that involuntary job loss is associated with a 20% reduction in money-metric utility for households younger than 60 years old.

Date: 2024-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19263 (application/pdf)
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 subscribers@cepr.org

Related works:
Working Paper: Sufficient Statistics for Measuring Forward-Looking Welfare (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:19263

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19263

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 ().