Robust Welfare Analysis under Individual Heterogeneity

Welfare effects of price changes are often estimated with cross-sectional data. However, cross-sectional data do not identify demand unless all consumers are assumed to be identical. We exploit higher moments of demand, identifiable from cross-sectional data, to develop estimates of average welfare...

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Bibliographic Details
Published in:arXiv.org 2023-06
Main Authors: Maes, Sebastiaan, Malhotra, Raghav
Format: Article
Language:English
Subjects:
Economic analysis
Estimates
Heterogeneity
Impact analysis
Online Access:Get full text
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Summary:Welfare effects of price changes are often estimated with cross-sectional data. However, cross-sectional data do not identify demand unless all consumers are assumed to be identical. We exploit higher moments of demand, identifiable from cross-sectional data, to develop estimates of average welfare effects that are robust to unobserved preference heterogeneity. Our local approximations do not impose any restrictions on unobservables. In addition, our approach enables robust inference on the distribution of welfare changes. Finally, we obtain conditions that moments of demand must satisfy to arise from a population of rational consumers. We illustrate our methods on household budget survey data from the UK.
ISSN:2331-8422