Abstract
What is the welfare effect of a price change? The paper addresses this question by empirically comparing welfare measures and computational methods under different demand systems, parameters choices and price shocks. In the context of individual welfare and as a rule of thumb, welfare measures converge to approximately the same values for price changes below 10%. Above this threshold, these measures start to diverge significantly. Budget shares play an important role in explaining such divergence, whereas the choice of demand system has a minor role. These findings generally hold in the context of social welfare. Statistical inference and stochastic dominance help to refine results, particularly for the lower parts of the income distributions.
Similar content being viewed by others
Notes
See Hicks (1942).
This Survey was conducted by the United States Department of Agriculture. The full documentation for the survey can be found at: https://www.ars.usda.gov/northeast-area/beltsville-md/beltsville-human-nutrition-research-center/food-surveys-research-group/docs/past-surveys. The sample used for this paper consists of 4048 households. See also Poi (2002).
See for instance Ramskov and Munksgaard (2001).
We used the Stata command gen imp_wel = _n*(3+0.05*uniform()).
References
Ahmad E, Stern N (1984) The theory of reform and indian indirect taxes. J Public Econ 25:259–298
Ahmad E, Stern NH (1991) The theory and practice of tax reform in developing countries. Cambridge University Press, Cambridge
Araar A, Verme P (2016) Prices and welfare. In: Policy research working paper series 7566, The World Bank
Banks J, Blundell R, Lewbel A (1996) Tax reform and welfare measurement: do we need demand system estimation? Econ J 106:1227–1241
Banks J, Blundell R, Lewbel A (1997) Quadratic Engel curves and consumer demand. Rev Econ Stat 79:527–539
Breslaw JA, Smith JB (1995) A simple and efficient method for estimating the magnitude and precision of welfare changes. J Appl Econom 10:313–327
Creedy J (1998) Measuring the welfare effects of price changes: a convenient parametric approach. Aust Econ Pap 37:137–151
Creedy J (2001) Indirect tax reform and the role of exemptions. Fisc Stud 22:457–486
Creedy J, van de Ven J (1997) The distributional effects of inflation in Australia 1980–1995. Aust Econ Rev 30:125–143
Deaton A (1989) Rice prices and income distribution in Thailand: a non-parametric analysis. Econ J 99:1–37
Deaton A, Muellbauer J (1980) An almost ideal demand system. Am Econ Rev 70:312–336
Duclos J-Y (2009) What is pro-poor? Soc Choice Welf 32:37–58
Ferreira FHG, Fruttero A, Leite P, Lucchetti L (2011) Rising food prices and household welfare: evidence from Brazil in 2008. In: Policy research working paper series 5652, The World Bank
Fleurbaey M (2009) Beyond GDP: the quest for a measure of social welfare. J Econ Lit 47:1029–1075
Harberger AC (1971) Three basic postulates for applied welfare economics: an interpretive essay. J Econ Lit 9:785–797
Hicks JR (1942) Consumer surplus and index-numbers. Rev Econ Stud 9:126–137
Jacoby HG (2015) Food prices, wages, and welfare in rural India. Econ Inq 54:159–176
Kakwani N, Pernia E (2000) What is pro-poor growth? Asian Dev Rev 18:1–16
King M (1983) Welfare analysis of tax reforms using household data. J Public Econ 21:183–214
Lewbel A, Pendakur K (2009) Tricks with hicks: the EASI demand system. Am Econ Rev 99:827–863
McKenzie L (1957) Demand theory without a utility index. Rev Econ Stud 24:185–189
Minot N, Dewina R (2013) Impact of food price changes on household welfare in Ghana. In: Technical report
Poi BP (2002) From the help desk: demand system estimation. Stata J 2:403–410
Ramskov J, Munksgaard J (2001) Elasticities a theoretical introduction. In: Technical report, Balmorel Project: http://balmorel.com/doc/b-elasttheory0201.pdf
Rao R (1973) Linear statistical inference and its applications. Wiley, New York
Ravallion M (1990) Rural welfare effects of food price changes under induced wage responses: theory and evidence for Bangladesh. Oxf Econ Pap 42:574–585
Ravallion M, Chen S (2003) Measuring pro-poor growth. Econ Lett 78:93–99
Slesnick DT (1998) Empirical approaches to the measurement of welfare. J Econ Lit 36:2108–2165
Son H (2004) A note on pro-poor growth. Econ Lett 82:307–314
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Araar, A., Verme, P. Prices and welfare: a comparative analysis of measures and computational methods. Empir Econ 57, 1077–1101 (2019). https://doi.org/10.1007/s00181-018-1492-x
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-018-1492-x
Keywords
- Welfare measurements
- Consumer surplus
- Compensating Variation
- Equivalent Variation
- Laspeyres index
- Paasche index
- Demand systems