Econometric Demand and Welfare Analysis

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Market-interventions by the government are ubiquitous in real life and include taxes and subsidies on products and services, regulation of industries and moderation of market-power, expansion of catchment areas for school-choice, behavioral nudges and subsidies to steer under-informed decision-makers towards their optimal choice of insurance products, and so forth. The proposed project aims to develop novel econometric tools for practical cost-benefit analysis of such interventions using micro-level data. The key challenge of such calculations is the measurement of the benefits via consumer welfare, which equals the monetary value to the consumer of the change resulting from the policy intervention, that is typically unobserved by a researcher. Further, when consumers differ in preferences, the benefits and costs are heterogeneous, hence statistical analysis is required to characterize the distribution of welfare across the population. The proposed project aims to develop econometric tools to enable such analysis. These tools will be useful for (1) understanding the nature of consumer preferences from observed choice behavior, and (2) for applying that knowledge to evaluate existing and potential public policies in terms of their impact on social welfare in a variety of important real-life contexts such as education, housing, healthcare, commuter travel and holiday accommodation. The proposal consists of four parts addressing the following specific questions:(A) How to incorporate aggregate social welfare in econometric program evaluation and the optimal targeting of policies; the existing literature typically foucuses on an individual outcome as its object of study, as opposed to how much that particular outcome is worth to the individual herself.(B) how to measure consumer welfare in hedonic settings where there are many possible alternatives, each characterized by a few features that individuals have preference over, such as local amenities and crime in housing choice and student-teacher ratio and academic outcomes in school-choice.(C) how to test optimality of individuals' choice of insurance-plans and the welfare potential of nudges in insurance markets, using micro-data on choice of cover and subsequent claims.(D) how to use `big data' collected from online listings to analyze demand patterns and consumer welfare in markets with both traditional and online providers, with an application to calculating the welfare impact of the shared accommodation service Airbnb. The common theme of these sub-projects is the development of novel econometric methods for analyzing cross-sectional data for practical welfare calculations that are founded on rigorous economic theory. The ultimate goal is to obtain credible empirical results by imposing minimal or no assumptions on heterogeneity in individual preferences unobserved by researchers. This is in contrast to available empirical tools for welfare analysis in the existing econometric literature which rely on analytically convenient but economically unsubstantiated ad-hoc assumptions on consumer preferences and their heterogeneity. As such, the proposed project will build on the research programme started by the PI that was funded by a 5-year Consolidator grant by the European Research Council between 2016-21, and expand its boundaries both substantively to previously unexplored contexts and technically to analyzing new types of data in order to provide credible answers to fundamental policy questions relevant to these contexts.