Empirical Welfare Analysis with Hedonic Budget Constraints

TL;DR

This paper develops nonparametric methods for welfare analysis in demand models with nonlinear budget constraints, providing new theoretical results and applying them to evaluate policy impacts using real data.

Contribution

It introduces Roy's identity for nonlinear budgets, a PDE system for demand, and a Slutsky-like symmetry condition, advancing welfare analysis with hedonic budget constraints.

Findings

Derived a PDE system for demand with nonlinear budgets

Established a Slutsky-like symmetry condition for demand

Applied methods to evaluate welfare changes in property rent and school quality

Abstract

We analyze demand settings where heterogeneous consumers maximize utility for product attributes subject to a nonlinear budget constraint. We develop nonparametric methods for welfare-analysis of interventions that change the constraint. Two new findings are Roy's identity for smooth, nonlinear budgets, which yields a Partial Differential Equation system, and a Slutsky-like symmetry condition for demand. Under scalar unobserved heterogeneity and single-crossing preferences, the coefficient functions in the PDEs are nonparametrically identified, and under symmetry, lead to path-independent, money-metric welfare. We illustrate our methods with welfare evaluation of a hypothetical change in relationship between property rent and neighborhood school-quality using British microdata.