Periodic Reporting for period 4 - EDWEL (Empirical Demand and Welfare Analysis)
Reporting period: 2021-04-01 to 2022-09-30
Measurement of consumer welfare plays a central role in economic evaluations such as the calculation of price-indices, the formulation of tax/subsidy policies and regulation of mergers. The project has developed tools for demand analysis and welfare-evaluation corresponding to policy-interventions in the common real-life setting of discrete-choice. Examples include the impact of tuition subsidies for college entrants, fare-hikes for passengers and access to new channels for TV viewers. Previously existing methods in the literature had either made strong ad-hoc assumptions for such calculations, leading to potentially incorrect inference, or have not clarified the fundamental connection between the economic theory of choice among discrete alternatives and their empirical implications for demand and welfare predictions. The project EDWEL has, to an appreciable extent, filled this gap. In particular, it has developed methods for four distinct but related problems, viz. (i) welfare analysis of price and quality change in choice settings involving multinomial, ordered or non-exclusive alternatives, (ii) predicting demand and welfare effects of price interventions in settings where an individual’s choice affects their peers’ utilities, such as health product adoption that can generate externalities and schooling decisions that produce peer-effects, (iii) understanding the connection between the economic theory of utility maximization by heterogeneous consumers and observable discrete choice demand data, and the implications thereof for predicting demand and welfare resulting from future/counterfactual policy changes, and (iv) application of rational choice theory and welfare results to understand two socially important discrete choice decisions in the educational sphere, viz. (i) how universities select applicants for admission, and (ii) the implied cash-value of publicly provided schooling in developing countries.
I have by now completed all of the sub-projects stated in my original proposal.
The first project developed methods for calculating consumer welfare effects of economic changes in multinomial choice settings, under general unobserved heterogeneity in consumer-taste. These results cover simultaneous price change of multiple alternatives (e.g. as after mergers), quality change and introduction of new goods or removal of existing alternatives. These results were published in the journal Quantitative Economics in 2018.
The next subproject, in collaboration with Dr Ying ying Lee of the University of California Irvine, developed methods for calculation of consumer welfare as in the above problem, but where individual consumers' income data are reported in intervals, as is often the case with survey data. This practical problem that one faces in calculating empirical welfare estimates, nonetheless, lends itself to a bounds analysis. In our project, we show how to construct the best-approximation bounds on welfare effects, taking into account shape restrictions implied by economic theory. This paper has now been published in the Journal of Econometrics.
I have also completed the work on welfare analysis in discrete choice models with social interactions, in collaboration with Pascaline Dupas of Stanford and Shin Kanaya of Aarhus. In this project, we have shown how to estimate preference parameters in interactive decision models with large number of individuals interacting with each other. We have also developed methods to calculate demand predictions and bounds on welfare effects resulting from a hypothetical price change, such as an income-contingent subsidy. The key results are that exact welfare analysis is not possible in presence of social interactions even when expected demand can be point-identified but bounds can be constructed, which are usually very wide. These theoretical results have been illustrated with an empirical example of mosquito-net adoption in rural Kenya. The resulting paper has now been accepted for publication at the Review of Economic Studies.
I have further developed (i) results on rationalizability in discrete choice models, now published in Econometrica in 2021, (ii) methods for understanding admissions to elite universities (a binary decision for each applicant taken by admission tutors) via rational choice theory through a project co-authored with Julia Shvets, which is under revision at the Journal of Political Economy, and (iii) methods to calculate the implied cash-equivalent of publicly provided schooling in developing countries with implications for poverty and inequality calculations, published in the journal Sankhya in 2022 (co-authored with Rohini Somanathan and Anders Kjelsrud).
The first project developed methods for calculating consumer welfare effects of economic changes in multinomial choice settings, under general unobserved heterogeneity in consumer-taste. These results cover simultaneous price change of multiple alternatives (e.g. as after mergers), quality change and introduction of new goods or removal of existing alternatives. These results were published in the journal Quantitative Economics in 2018.
The next subproject, in collaboration with Dr Ying ying Lee of the University of California Irvine, developed methods for calculation of consumer welfare as in the above problem, but where individual consumers' income data are reported in intervals, as is often the case with survey data. This practical problem that one faces in calculating empirical welfare estimates, nonetheless, lends itself to a bounds analysis. In our project, we show how to construct the best-approximation bounds on welfare effects, taking into account shape restrictions implied by economic theory. This paper has now been published in the Journal of Econometrics.
I have also completed the work on welfare analysis in discrete choice models with social interactions, in collaboration with Pascaline Dupas of Stanford and Shin Kanaya of Aarhus. In this project, we have shown how to estimate preference parameters in interactive decision models with large number of individuals interacting with each other. We have also developed methods to calculate demand predictions and bounds on welfare effects resulting from a hypothetical price change, such as an income-contingent subsidy. The key results are that exact welfare analysis is not possible in presence of social interactions even when expected demand can be point-identified but bounds can be constructed, which are usually very wide. These theoretical results have been illustrated with an empirical example of mosquito-net adoption in rural Kenya. The resulting paper has now been accepted for publication at the Review of Economic Studies.
I have further developed (i) results on rationalizability in discrete choice models, now published in Econometrica in 2021, (ii) methods for understanding admissions to elite universities (a binary decision for each applicant taken by admission tutors) via rational choice theory through a project co-authored with Julia Shvets, which is under revision at the Journal of Political Economy, and (iii) methods to calculate the implied cash-equivalent of publicly provided schooling in developing countries with implications for poverty and inequality calculations, published in the journal Sankhya in 2022 (co-authored with Rohini Somanathan and Anders Kjelsrud).
The project has stretched the boundaries of our knowledge regarding empirical analysis of demand and welfare in discrete choice settings. The project has shone new light on both the theoretical connections between rational choice and data in such settings, as well as their practical implications for answering substantive questions using real data. The work has led to four top journal publications (Econometrica, Review of Economic Studies, Quantitative Economics and Journal of Econometrics), as well as a revise-and-resubmit at a top journal (Journal of political Economy). Extensive travel and collaborations facilitated by the grant have led to both the development of many of the constituent ideas, throwing up new research problems and also extensive dissemination of the research output resulting from the grant-funded research.