Counterfactual and Welfare Analysis with an Approximate Model

2020/09/07 by R. G. D. Allen, Allen, Roy, John Rehbeck +1 · 1 citation
Business, Management and Accounting · Economics, Econometrics and Finance · Energy · #Consumer Market Behavior and Pricing #Econometrics (econ.EM) #Energy, Environment, and Transportation Policies #FOS: Economics and business #General Economics (econ.GN) #Monetary Policy and Economic Impact

paper · pdf · doi:10.48550/arxiv.2009.03379

openalex publication_date 2020/09/07 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

We propose a conceptual framework for counterfactual and welfare analysis for approximate models. Our key assumption is that model approximation error is the same magnitude at new choices as the observed data. Applying the framework to quasilinear utility, we obtain bounds on quantities at new prices using an approximate law of demand. We then bound utility differences between bundles and welfare differences between prices. All bounds are computable as linear programs. We provide detailed analytical results describing how the data map to the bounds including shape restrictions that provide a foundation for plug-in estimation. An application to gasoline demand illustrates the methodology.

Citations

• The Construction of Utility Functions from Expenditure Data
• The Nonparametric Approach to Demand Analysis
• Time to Build and Aggregate Fluctuations

Cited by

• Non-rationalizable Individuals, Stochastic Rationalizability, and Sampling

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