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This article shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer under-reaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by differences in under-reaction across individuals and across tax rates. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers purchase common household products, facing tax rates that vary in size and salience. We replicate prior findings that, on average, consumers under-react to non-salient sales taxes—consumers in our study react to existing sales taxes as if they were only 25% of their size. However, we find significant individual differences in this under-reaction, and accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%. Tripling existing sales tax rates nearly doubles consumers’ attention to taxes, and accounting for this endogeneity increases efficiency cost estimates by 336%. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioural welfare analysis.

This paper studies the fiscal costs of unemployment insurance (UI). It surveys alternative methods used in the literature to estimate the impact of UI on government budgets and compares them within a unified framework that incorporates behavioral responses, wage effects, and fiscal externalities. These methods are then applied to administrative data from Argentina. Combined with estimates of the consumption drop following unemployment, the paper evaluates the Marginal Value of Public Funds (MVPF) for UI and finds that, while results vary depending on the treatment of fiscal externalities, MVPF is generally above one—indicating that the social benefits of marginal increases in UI outweigh their fiscal costs.   JEL Classification Codes: I38; J65; D61; C41

We conduct field experiments to investigate dynamic inconsistency and commitment demand in food choice. In two home grocery delivery programs, we document substantial dynamic inconsistency between advance and immediate choices. When given the option to commit to their advance choices, around half of subjects take it up. Commitment demand is negatively correlated with dynamic inconsistency, suggesting those with larger self-control problems are less likely to be aware thereof. We evaluate the welfare consequences of dynamic inconsistency and commitment policies with utility measures based on advance, immediate, and unambiguous choices. Simply offering commitment has limited welfare (and behavioural) consequences under all measures.

The Great Recession has renewed interest in unemployment insurance (UI) programs around the world. At the same time, there have been important advances in both theory and measurement of UI. In this review, we first use the theory to present a unified treatment of the welfare effects of UI benefit levels and durations and derive convenient expressions of the full disincentive effect of UI. We then discuss recent estimates of the effect of UI benefit levels and durations on labor supply based on newly available administrative data and quasi-experimental research designs. Although our review of the new estimates confirms the range of negative labor supply effects of the previous literature, we show, based on the model, that these estimates are imperfect proxies for the actual disincentive effects. We also discuss several active areas of research on UI. These include the effect of UI on aggregate labor market outcomes, its effect on job outcomes, its long-term effects, its effects under nonstandard behavioral assumptions, and its interactions with other programs. We isolate several additional areas in need of further research, including estimates of the social value of UI, as well as the effects of UI in less developed countries.

We consider empirical measurement of equivalent variation (EV) and compensating variation (CV) resulting from price change of a discrete good using individual-level data when there is unobserved heterogeneity in preferences. We show that for binary and unordered multinomial choice, the marginal distributions of EV and CV can be expressed as simple closed-form functionals of conditional choice probabilities under essentially unrestricted preference distributions. These results hold even when the distribution and dimension of unobserved heterogeneity are neither known nor identified, and utilities are neither quasilinear nor parametrically specified. The welfare distributions take simple forms that are easy to compute in applications. In particular, average EV for a price rise equals the change in average Marshallian consumer surplus and is smaller than average CV for a normal good. These nonparametric point-identification results fail for ordered choice if the unit price is identical for all alternatives, thereby providing a connection to Hausman—Newey's (2014) partial identification results for the limiting case of continuous choice.

This paper performs an ex-post cost–benefit and distribution analysis of the Gothenburg congestion charges introduced in 2013, based on observed effects and an ex-post evaluated transport model. Although Gothenburg is a small city with congestion limited to the highway junctions, the congestion charge scheme is socially beneficial, generating a net surplus of €20 million per year. From a financial perspective, the investment cost was repaid in slightly more than a year and, from a social surplus perspective, is repaid in < 4 years. Still, the sums that are redistributed in Gothenburg are substantially larger than the net benefit. In the distribution analysis we develop an alternative welfare rule, where the utility is translated to money by dividing the utility by the average marginal utility of money, thereby avoiding putting a higher weight on high-income people. The alternative welfare rule shows larger re-distribution effects, because paying charges is more painful for low-income classes due to the higher marginal utility of money. Low-income citizens pay a larger share of their income because all income classes are highly car dependent in Gothenburg and workers in the highest income class have considerably higher access to company cars for private trips. No correlation was found between voting pattern and gains, losses or net gain.

Information regarding the quality of colleges and labor‐market prospects of majors plays an important role in parents' and students' school‐choice decisions, particularly when these decisions are crucially relevant to the students' long‐run career choices and life earnings. This paper studies the impact of information intervention under the current college admission system in China, exploring how access to college‐major–related information affects students' preferences, thus resulting in changes to school majors' score lines, students' welfare, and industrial productivity. We consider a setting where there are a finite set of students and a finite set of schools, each school offering two majors featuring high or low labor‐market returns. We find that the score lines for high‐return majors rise, while those for low‐return majors fall, primarily due to changes in preferences among some “pivotal” students in the admission process. Moreover, a majority of students benefit from information intervention, though some students experience welfare deterioration, and the distribution of such benefits and losses depends on students' types of preferences. Without school‐prioritized preferences, more students can benefit, and students with higher scores will benefit more. When all students' preferences are school‐prioritized, students with different scores benefit almost equally from the information intervention. Our findings offer insights for upgrading information consulting services and designing career‐oriented college majors for China's college admission problems.

The study examines the relationship between electricity prices and household welfare in South Africa. The study employs a demand system framework on annual time-series data from 2000 to 2018 and the analysis involves the calculation of price elasticities and measurement of welfare changes. The price elasticities in this study are drawn from the linear expenditure demand model. To analyse welfare change, we consider the impact of electricity pricing policies on cost of living (proxied by the consumer price index and households’ expenditure patterns). The study achieves this: (i) by comparing electricity price movements to changes in the rate of inflation between 2000 and 2018; (ii) by regressing total household energy expenditure against household expenditure on electricity, to examine how electricity costs affect a household’s overall energy bills; and (iii) thirdly, by regressing household food expenditure against households’ electricity expenditure to determine how the latter affects a household’s ability to spend on other basic goods and services. The results of the study show: (i) South African household electricity demand is inelastic to changes in price of electricity; (ii) electricity prices in the country increased at a higher rate than the rate of inflation for most of the time during the study period, suggesting that households incurred increased expenditures to achieve their desired utility or satisfy their energy needs during this period; (iii) household total electricity expenditure is positively related to household total energy expenditure, implying that high household expenditure on electricity exerts upward pressure on the overall household energy budgets; and (iv) household total food expenditure is negatively related to household total energy expenditure. This shows that while policy makers achieved significant success with providing physical access to electricity, affordable access to this basic service is still a concern and affects the overall welfare of households in the country. The study recommends a review of the country’s electricity tariff structure to make affordability a key objective. Moreover, the study calls for coordinated efforts in addressing Eskom challenges which have also played a contributing role to the current energy crisis, characterized by an unreliable electricity supply and constantly increasing electricity prices.

An individual displays various preference orderings in different payoff-irrelevant circumstances. It is assumed that the variation in the observed preference orderings is the outcome of some cognitive process that distorts the underlying preferences of the individual. We introduce a framework for eliciting the individual's underlying preferences in such cases and then demonstrate it for two cognitive processes—satisficing and small assessment errors.