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Environmental Economics Seminar: Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods

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Date(s): March 23, 2011; 1-2:30 PM

Location: Room 6226, Ariel Rios South Building, 1301 Constitution Ave., NW, Washington, DC

Contact: Carl Pasurka, 202-566-2275

Presenter: Raj Chetty (Department of Economics, Harvard University)

Description: The debate between "structural" and "reduced-form" approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reduced-form strategies - transparent and credible identification - with an important advantage of structural models - the ability to make predictions about counterfactual outcomes and welfare. This literature has developed formulas for the welfare consequences of various policies that are functions of reduced-form elasticities rather than structural primitives. I present a general framework that shows how many policy questions can be answered by estimating a small set of sufficient statistics using program evaluation methods. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss problems in macroeconomics, labor, development, and industrial organization that could be tackled using the sufficient statistic approach.

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