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Empirical welfare analysis for discrete choice: Some general results

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Peer-reviewed

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Article

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Authors

Bhattacharya, Debopam  ORCID logo  https://orcid.org/0000-0002-2870-7898

Abstract

This paper develops nonparametric methods for welfare-analysis of economic changes in the common setting of multinomial choice. The results cover (a) simultaneous price-change of multiple alternatives, (b) introduction/elimination of an option, (c) changes in choice-characteristics, and (d) choice among non-exclusive alternatives. In these cases, Marshallian consumer surplus becomes path-dependent, but Hicksian welfare remains well-defined. We demonstrate that under completely unrestricted preference-heterogeneity and income-effects, the distributions of Hicksian welfare are point-identified from structural choice-probabilities in scenarios (a), (b), and only set-identified in (c), (d). In program-evaluation contexts, our results enable the calculation of compensated-effects, i.e. the program's cash-equivalent and resulting deadweight-loss. They also facilitate theoretically justified cost-benefit comparison of interventions targeting different outcomes, e.g. a tuition-subsidy and a health-product subsidy. Welfare-analyses under endogeneity is briefly discussed. An application to data on choice of fishing-mode illustrates the methods.

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Keywords

38 Economics, 3801 Applied Economics, 3802 Econometrics

Journal Title

Quantitative Economics

Conference Name

Journal ISSN

1759-7323
1759-7331

Volume Title

9

Publisher

The Econometric Society

Rights

Attribution-NonCommercial 4.0 International (CC BY-NC 4.0)
Sponsorship
European Research Council (681565)
This project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement No. 681565).