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Prices and welfare: a comparative analysis of measures and computational methods

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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.

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Notes

  1. See Hicks (1942).

  2. 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).

  3. See Deaton and Muellbauer (1980), Banks et al. (1997), Lewbel and Pendakur (2009).

  4. See for instance Ramskov and Munksgaard (2001).

  5. We used the Stata command gen imp_wel = _n*(3+0.05*uniform()).

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Correspondence to Paolo Verme.

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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

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