Working Paper: NBER ID: w29656
Authors: Zi Yang Kang; Shoshana Vasserman
Abstract: Economists routinely make functional form assumptions about consumer demand to obtain welfare estimates. How sensitive are welfare estimates to these assumptions? We answer this question by providing bounds on welfare that hold for families of demand curves commonly considered in different literatures. We show that commonly chosen functional forms, such as linear, exponential, and CES demand, are extremal in different families: they yield either the highest or lowest welfare estimate among all demand curves in those families. To illustrate our approach, we apply our results to the welfare analysis of energy subsidies, trade tariffs, pensions, and income taxation.
Keywords: welfare analysis; consumer demand; functional form assumptions; elasticity; demand curves
JEL Codes: C14; C51; D04; D61; H2; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax changes (H26) | consumer surplus (D46) |
| tax changes (H26) | welfare estimates (I38) |
| choice of functional form (C51) | welfare estimates (I38) |
| CES demand curve minimizes loss in consumer surplus (D11) | welfare estimates (I38) |
| linear demand curve maximizes consumer surplus (D11) | welfare estimates (I38) |