Robust Hicksian Welfare Analysis under Individual Heterogeneity

Sebastiaan Maes and Raghav Malhotra
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Sebastiaan Maes: University of Antwerp
Raghav Malhotra: University of Leicester

CRETA Online Discussion Paper Series from Centre for Research in Economic Theory and its Applications CRETA

Abstract: Welfare e ects of price changes are often estimated with cross-sections ; these do not identify demand with heterogeneous consumers. We develop a theoretical method addressing this, utilizing uncompensated demand moments to construct local approximations for compensated demand moments, robust to unobserved preference heterogeneity. Our methodological contribution offers robust approximations for average and distributional welfare estimates, extending to price indices, taxable income elasticities, and general equilibrium welfare. Our methods apply to any cross-section; we demonstrate them via UK household budget survey data. We uncover an insight: simple non-parametric representative agent models might be less biased than complex parametric models accounting for heterogeneity.

Keywords: nonparametric welfare analysis; individual heterogeneity; Hicksian demand; compensating variation; exact consumer surplus; deadweight loss; price indices JEL codes: C14; C31; D11; D12; D63; H22; I31 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dcm
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