Loss Aversion and the Welfare Ranking of Policy Interventions
Antonio F. Galvao (),
Martyna Kobus (),
Thomas Parker and
Pedro Rosa-Dias ()
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Antonio F. Galvao: University of Arizona
Martyna Kobus: Institute of Economics, Polish Academy of Sciences
Pedro Rosa-Dias: Imperial College London
No 13176, IZA Discussion Papers from Institute of Labor Economics (IZA)
In this paper we develop theoretical criteria and econometric methods to rank policy interventions in terms of welfare when individuals are loss-averse. The 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. We establish the limiting distributions of uniform test statistics by showing that they are directionally differentiable. This implies that inference can be conducted by a special resampling procedure. Since point-identification of the distribution of policy-induced gains and losses may require very strong assumptions, we also extend comparison criteria, test statistics, and resampling procedures to a partially-identified case. Finally, we illustrate our methods with an empirical application to welfare comparison of two income support programs.
Keywords: welfare; loss aversion; policy evaluation; stochastic ordering; directional differentiability (search for similar items in EconPapers)
JEL-codes: C12 C14 I30 (search for similar items in EconPapers)
Pages: 67 pages
New Economics Papers: this item is included in nep-gen, nep-ore and nep-upt
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Working Paper: Loss aversion and the welfare ranking of policy interventions (2020)
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