Incorporating Social Welfare in Program-Evaluation and Treatment Choice

TL;DR

This paper develops a method to incorporate aggregate utility into econometric program evaluation, enabling nonparametric cost-benefit analysis and optimal treatment targeting in heterogeneous populations, especially for discrete-choice models.

Contribution

It introduces a framework to include social welfare in treatment-effect analysis, accounting for unobserved utilities and preference heterogeneity, with practical applications to policy targeting.

Findings

Utility distributions can be expressed as a functional of demand in discrete-choice models.

The method allows for welfare-maximizing policy targeting based on utility considerations.

Application to Indian survey data shows significant differences between usage-maximizing and welfare-maximizing subsidies.

Abstract

The econometric literature on treatment-effects typically takes functionals of outcome-distributions as `social welfare' and ignores program-impacts on unobserved utilities. We show how to incorporate aggregate utility within econometric program-evaluation and optimal treatment-targeting for a heterogenous population. In the practically important setting of discrete-choice, under unrestricted preference-heterogeneity and income-effects, the indirect-utility distribution becomes a closed-form functional of average demand. This enables nonparametric cost-benefit analysis of policy-interventions and their optimal targeting based on planners' redistributional preferences. For ordered/continuous choice, utility-distributions can be bounded. Our methods are illustrated with Indian survey-data on private-tuition, where income-paths of usage-maximizing subsidies differ significantly from welfare-maximizing ones.