Working Paper: NBER ID: w26890
Authors: David Atkin; Benjamin Faber; Thibault Fally; Marco Gonzalez-Navarro
Abstract: We propose and implement a new approach that allows us to estimate income-specific changes in household welfare in contexts where well-measured prices are not available for important subsets of consumption. Using rich but widely available expenditure survey microdata, we show that we can recover income-specific equivalent and compensating variations as long as preferences fall within the broad quasi-separable class (Gorman 1970; 1976). Our approach is flexible enough to allow for non-parametric estimation at each point of the income distribution. We implement this approach to estimate inflation and welfare changes in rural India between 1987 and 2000, and to revisit the impacts of India’s trade reforms. Our estimates reveal that lower rates of inflation for the rich erased the real income convergence documented by the existing literature that uses the subset of consumption with well-measured prices to calculate inflation.
Keywords: Welfare; Inequality; Price Information; Quasiseparable Preferences; Household Expenditure
JEL Codes: D12; E31; F63; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quasiseparability (C21) | recovery of income-specific welfare changes (D31) |
| relative expenditure shares change with total outlays (D12) | recovery of income-specific welfare changes (D31) |
| horizontal shift in the relative Engel curve (D11) | log price index change for a given income level (E25) |
| quasiseparability (C21) | log price index change for a given income level (E25) |
| estimated inflation rates differ significantly across income deciles (E31) | higher-income households experienced lower inflation rates (D19) |