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

Author

Listed:
  • Abdelkrim Araar

    (University of Laval)

  • Paolo Verme

    (World Bank)

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.

Suggested Citation

  • Abdelkrim Araar & Paolo Verme, 2019. "Prices and welfare: a comparative analysis of measures and computational methods," Empirical Economics, Springer, vol. 57(4), pages 1077-1101, October.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:4:d:10.1007_s00181-018-1492-x
    DOI: 10.1007/s00181-018-1492-x
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    More about this item

    Keywords

    Welfare measurements; Consumer surplus; Compensating Variation; Equivalent Variation; Laspeyres index; Paasche index; Demand systems;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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