An Empirical Analysis of the Welfare Consequences of Rising Food Prices in Urban China: The Easi Approach

Abstract

AbstractThe recent rise in food prices in China triggered by global commodity price spikes led to growing welfare concerns among economists and policymakers. While evidence suggests the Chinese government was successful in preventing major upswings in food prices, the true impact on consumer welfare remains unknown. This study examines consumer welfare consequences of food price increases in China based on the Fixed‐Effects Exact Affine Stone Index (FE‐EASI) demand model that accounts for unobserved consumer and provincial heterogeneity estimated on nationally representative provincial‐level panel data. The effects of actual price changes as well as two policy initiatives are evaluated. The major findings indicate that urban wages outpaced food prices, and consumer welfare loss has been moderate as a fraction of food expenditures. The results of policy analysis indicate that government subsidies overcompensated the negative effects of price increases for the relatively less affluent households.