Loss Aversion and the Welfare Ranking of Policy Interventions

Arbeitspapier

In this paper we develop theoretical criteria and econometric methods to rank policy interventions in terms of welfare when individuals are loss-averse. The new criterion for "loss aversion-sensitive dominance" defines a weak partial ordering of the distributions of policy-induced gains and losses. It applies to the class of welfare functions which model individual preferences with non-decreasing and loss-averse attitudes towards changes in outcomes. We also develop new statistical methods to test loss aversion-sensitive dominance in practice, using nonparametric plug-in estimates. We establish the limiting distributions of uniform test statistics by showing that they are directionally differentiable. This implies that inference can be conducted by a special resampling procedure. Since point-identification of the distribution of policy-induced gains and losses may require very strong assumptions, we also extend comparison criteria, test statistics, and resampling procedures to a partially-identified case. Finally, we illustrate our methods with an empirical application to welfare comparison of two income support programs.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 13176

Classification and Topics

• Classification: Wirtschaft ; Hypothesis Testing: General ; Semiparametric and Nonparametric Methods: General ; Welfare, Well-Being, and Poverty: General
• Subject: welfare ; loss aversion ; policy evaluation ; stochastic ordering ; directional differentiability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Firpo, Sergio ; Galvao, Antonio F. ; Kobus, Martyna ; Parker, Thomas ; Rosa-Dias, Pedro
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/216488
• Last update: 10.03.2025, 11:44 AM CET