Journal of Economic Literature
ISSN 0022-0515 (Print) | ISSN 2328-8175 (Online)
Nonparametric Approaches to Empirical Welfare Analysis
Journal of Economic Literature
vol. 62,
no. 2, June 2024
(pp. 554–93)
Abstract
Welfare analysis of policy interventions is ubiquitous in economic research. It plays an important role in merger analysis and antitrust litigation, design of tax and subsidies, and informs the current debate on a universal basic income. This paper provides a survey of existing empirical methods, based on cross-sectional microdata, for calculating welfare effects and deadweight loss resulting from realized or hypothetical policy change. We briefly outline classical parametric methods that are computationally tractable, then discuss recent nonparametric approaches that avoid making statistical and functional-form restrictions on individual preferences. This makes the welfare estimates theoretically more credible, and clarifies exactly what welfare-relevant information is contained in demand distribution in various choice settings. However, these methods also demand greater in-sample variation in the data for practical implementation than classical parametric approaches. We then cover settings with externalities. The above results are theoretical, and take the demand function as known; therefore, we briefly discuss empirical problems around demand estimation. We conclude by suggesting areas for future research.Citation
Bhattacharya, Debopam. 2024. "Nonparametric Approaches to Empirical Welfare Analysis." Journal of Economic Literature 62 (2): 554–93. DOI: 10.1257/jel.20221534Additional Materials
JEL Classification
- C14 Semiparametric and Nonparametric Methods: General
- C35 Multiple or Simultaneous Equation Models: Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- D11 Consumer Economics: Theory
- D60 Welfare Economics: General
- D62 Externalities