Working Paper: NBER ID: w14399
Authors: Raj Chetty
Abstract: The debate between "structural" and "reduced-form" approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reduced-form strategies -- transparent and credible identification -- with an important advantage of structural models -- the ability to make predictions about counterfactual outcomes and welfare. This recent work has developed formulas for the welfare consequences of various policies that are functions of high-level elasticities rather than deep primitives. These formulas provide theoretical guidance for the measurement of treatment effects using program evaluation methods. I present a general framework that shows how many policy questions can be answered by identifying a small set of sufficient statistics. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss topics in labor economics, industrial organization, and macroeconomics that can be tackled using the sufficient statistic approach.
Keywords: Welfare Analysis; Structural Methods; Reduced-Form Methods; Sufficient Statistics; Public Economics
JEL Codes: C1; H0; J0; L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income Tax Rate (H29) | Marginal Welfare Gain (D69) |
| Elasticity of Taxable Income (H31) | Marginal Welfare Gain (D69) |
| Labor Supply Elasticity Estimates (J20) | Optimal Tax Policy (H21) |
| Structural Parameters from Sufficient Statistics (C51) | Welfare Analysis (D69) |