Working Paper: NBER ID: w19177
Authors: Nathaniel Hendren
Abstract: This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, I term them policy elasticities, to distinguish them from Hicksian and Marshallian elasticities. The model also formally justifies a simple benefit-cost ratio for non-budget neutral policies. Using existing causal estimates, I apply the framework to five policy changes: top income tax rate, EITC generosity, food stamps, job training, and housing vouchers.
Keywords: Policy Elasticity; Welfare Analysis; Causal Effects; Government Policy; Taxation
JEL Codes: D60; H00; I30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy changes (J18) | welfare impact (D69) |
| causal effects of policy changes (E65) | willingness to pay for policy changes (E64) |
| causal effects (C22) | social welfare (I38) |
| top marginal income tax rate (H29) | mechanical revenue loss (H27) |
| EITC generosity (H20) | welfare impact (D69) |
| food stamps (I38) | welfare impact (D69) |
| job training (M53) | welfare impact (D69) |
| housing vouchers (R21) | welfare impact (D69) |