Empirical Welfare Economics

TL;DR

This paper explores welfare economics using observed choice data instead of utility functions, establishing conditions for Pareto efficiency and applying these ideas to counterfactual analysis, policy evaluation, and inefficiency bounds.

Contribution

It introduces a novel approach to welfare analysis based on revealed preferences, linking efficiency to incomplete relations derived from choice data.

Findings

Efficiency characterized by incomplete relations and convexity.

Counterfactual choice analysis for individual consumers.

Bounds on inefficiency in Pareto suboptimal allocations.

Abstract

Welfare economics relies on access to agents' utility functions: we revisit classical questions in welfare economics, assuming access to data on agents' past choices instead of their utilities. Our main result considers the existence of utilities that render a given allocation Pareto optimal. We show that a candidate allocation is efficient for some utilities consistent with the choice data if and only if it is efficient for an incomplete relation derived from the revealed preference relations and convexity. Similar ideas are used to make counterfactual choices for a single consumer, policy comparisons by the Kaldor criterion, and offer bounds on the degree of inefficiency in a Pareto suboptimal allocation.