Nonparametric welfare and demand analysis with unobserved individual heterogeneity

Abstract

In this paper, we combine elementary revealed preference principles and nonparametric estimation techniques in order to obtain nonparametric bounds on the distribution of the money metric utility over a population of heterogeneous households. The main benefit of our approach is that it is independent of any functional specification on the household utility functions, which means that our results are robust against parametric specification errors. We further demonstrate that our methodology can be used to establish bounds on the distribution of the demand function for counterfactual price regimes. In order to demonstrate the relevance of our approach, we illustrate our findings using a repeated cross-sectional household consumption data set.