DP14550 Measuring Welfare and Inequality with Incomplete Price Information

Author(s): David Atkin, Benjamin Faber, Thibault Fally, Marco Gonzalez-Navarro
Publication Date: April 2020
Date Revised: December 2020
Keyword(s): Gains from trade, non-homothetic preferences, price indices, real income inequality
JEL(s): D12, E31, F63, O12
Programme Areas: International Trade and Regional Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14550

We propose and implement a new approach that allows us to estimate income-specific changes in household welfare in contexts where well-measured prices are not available for important subsets of consumption. Using rich but widely available expenditure survey microdata, we show that we can recover income-specific equivalent and compensating variations as long as preferences fall within the broad quasi-separable class (Gorman 1970; 1976). Our approach is flexible enough to allow for non-parametric estimation at each point of the income distribution. We implement this approach to estimate inflation and welfare changes in rural India between 1987 and 2000, and to revisit the impacts of India's trade reforms. Our estimates reveal that lower rates of inflation for the rich erased the real income convergence documented by the existing literature that uses the subset of consumption with well-measured prices to calculate inflation.