Working Paper: CEPR ID: DP10670
Authors: Rachel Griffith; Lars Nesheim; Martin O'Connell
Abstract: Random utility models are widely used to study consumer choice. The vast majority of applications make strong assumptions about the marginal utility of income, which restricts income effects, demand curvature and pass-through. We show that flexibly modeling income effects can be important, particularly if one is interested in the distributional effects of a policy change, even in a market in which, a priori, the expectation is that income effects will play a limited role. We allow for much more flexible forms of income effects than is common and we illustrate the implications by simulating the introduction of an excise tax.
Keywords: Compensation Variation; Demand Estimation; Income Effects; Oligopoly; Pass Through
JEL Codes: H20; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Flexible modeling of income effects (H31) | Accurate estimation of demand and welfare effects (D12) |
| Traditional models (C59) | Biased estimates of tax passthrough and welfare impacts (H31) |
| More general model (C59) | Accurate representation of consumer behavior and welfare changes (D12) |
| Standard specifications (Y20) | Failure to capture distributional consequences of tax introduction (H22) |
| Relaxing assumptions about income effects (H31) | Understanding implications of policy changes (D78) |