Price stabilization or income support? Preferences and cost of programmes

Purpose Over the past 25 years, direct cash transfers (often abbreviated as direct benefit transfer, DBT) to the poorer section of the society are gaining popularity over explicit subsidization of prices of essential commodities. One of the main arguments in favor of DBT is that it will cost the government less money and yet, the consumer benefit will be high. This paper aims to examine the proposition critically. Removal of price support exposes the consumers to market risk, and any income support programme must compensate the consumers accordingly. Design/methodology/approach The authors use a theoretical study where the model of a representative consumer under different specification of preferences is used to compare programme costs under price stabilization and income support programmes. Findings What the authors show in the paper that the comparative cost of the programmes crucially depends on the nature of preferences, as well as the good under question. For certain specifications of the indirect utility function and the marginal utility of money, one programme may cost less than the other. Any policymaker must take account of such nuances before making a blanket prescription. Research limitations/implications The main limitation is that only a representative consumer is taken. Practical implications The specification of indirect utility function plays a decisive role in deciding, which one these two policies, DBT or stabilizing price at a fixed level. Originality/value The main novelty of the paper is in the different specifications of the indirect utility function considered in the paper.

Hicksian Welfare Measures and the Normative Endowment Effect

We show that the Hicksian welfare measures of compensating variation and equivalent variation coincide if one of them is evaluated at a compensated income. The measures are nondecreasing in income if the varied attribute and income are complementary, and indirect utility is concave in income. Income monotonicity implies the normative endowment effect, where the equivalent variation exceeds the compensating variation. We provide sufficient conditions for the normative endowment effect and discuss empirical implications. In the global absence of a strict (anti-) endowment effect, both Hicksian welfare measures must be independent of income and the indirect utility function additively separable in income. (JEL D11, D63)

Identification and Semiparametric Estimation of Equilibrium Models of Local Jurisdictions

We develop a new model of household sorting in a system of residential neighborhoods. We show that this model is partially identified without imposing parametric restrictions on the distribution of unobserved tastes for neighborhood quality and the shape of the indirect utility function. The proof of identification is constructive and can be used to derive a new semiparameteric estimator. Our empirical application focuses on residential choices in the Pittsburgh metropolitan area. We find that sorting of households with children exhibit more stratification by income than sorting of households without children. (JEL C51, D12, H41, J12, R21, R23)

A NOTE ON IMPOSING LOCAL CURVATURE IN GENERALIZED LEONTIEF MODELS

In this paper, we build on Ryan and Wales (1998) and Moschini (1999) and impose curvature conditions locally on the generalized Leontief model, introduced by Diewert (1974). In doing so, we exploit the Hessian matrix of second order derivatives of the reciprocal indirect utility function, unlike Ryan and Wales (1998) and Moschini (1999), who exploit the Slutsky matrix.