Welfare Loss Research Articles

Do ride-hailing congestion fees in NYC work?

What is the impact of congestion policies targeting ride-hailing systems? This work empirically evaluates NYC’s congestion surcharge policy, particularly in light of the city’s forthcoming implementation of congestion pricing. Using a Difference-in-Differences (DiD) framework, our analysis reveals a statistically significant reduction of approximately 11% in overall ride-hailing travel volume following the implementation of the policy. In particular, Lyft experienced a 17% reduction in travel demand while Uber and yellow-cabs experienced reductions of about 9% and 8% respectively. We further elucidate two key mechanisms — travel distance and subway station availability — to explain this reduction. The surcharge policy has a more pronounced impact on shorter trips (with the most significant decline observed in trips less than one mile), and on ride-hailing trips originating from areas with at least one substitute (such as subway or Citi Bike). Furthermore,the policy’s effect seems more pronounced in lower-income areas of the city and seems to reduce street-hailing industry revenues by 8%. However, despite these reductions, the policy does not result in a corresponding decrease in traffic congestion. Thus, it seems that the policy results in a net welfare loss for the city, at least in the shorter term. Our findings provide insights for understanding the dynamics of congestion policies focused on the ride-hailing industry, especially as New York City prepares to introduce congestion pricing.

Pension inequality and collective pensions funds: the trade-offs of pension redistribution

ABSTRACT This paper evaluates the macroeconomic and welfare impacts of introducing a Collective Defined Contribution (CDC) scheme to reduce pension inequality within a Fully Funded Defined Contribution (FDC) system. Using an overlapping generations (OLG) model, we analyse the Chilean pension system to assess how a CDC scheme reallocates resources from high- to low-productivity pensioners, increasing overall welfare by improving the replacement rates of low-income retirees. Results show that implementing a CDC scheme boosts the capital stock and GDP while only slightly decreasing private savings and consumption. Although high-productivity workers experience a welfare loss due to increased contributions, the positive redistribution effect for low-productivity workers results in a net welfare gain for society. When compared to raising taxes on labour, capital, or consumption, the CDC scheme proves more efficient, as tax-based alternatives lead to larger welfare losses. Capital taxes significantly reduce investment and GDP, causing a 6.9% drop in steady-state consumption. Our findings are robust across different worker ratios, demonstrating that the CDC scheme is an effective policy for reducing pension inequality while supporting economic growth and maintaining overall welfare.

Welfare implications of rising imported food costs in the Caribbean

Vulnerability to external shocks such as supply shortages, price increases, disasters and political discord has severe implications for Caribbean food and nutrition security and the scale of economic losses. There is a need to understand how food price shocks impact Caribbean consumers, who are particularly vulnerable due to their heavy reliance on imported food. This study assessed the welfare impacts of rising imported food prices on Caribbean consumers using the linear approximated almost ideal demand system (LA-AIDS) model and compensating variation. The welfare implications of rising prices were assessed using three price shocks in: 2006–2008, 2010–2011, and 2020–2021. Hicksian price elasticities revealed that most imported food categories in the Caribbean region have inelastic demand, except for imported meat and seafood which was found to be elastic. Imported cereals and staples and fats and oils were the least responsive to price changes, while imported meat and seafood was highly responsive. The results of the compensating variation revealed that there were significant welfare losses in 2006–2008 and 2010–2011, when food prices drastically increased, as well as during the first year of the COVID-19 pandemic (2020–2021). Between 2006-2008 and 2010–2011, welfare losses were approximately US$1.54 billion and US$692.52 million, respectively, while food price inflation during the first year of the COVID-19 pandemic resulted in losses estimated at US$1.09 billion. This research highlights the need for regional policies to minimize welfare losses from rising food prices, including social safety nets for vulnerable households and investments in domestic agriculture and supply chain resilience.

Climate change and economic growth: Some critical reflections

Global warming may affect the economic development and, thus, the welfare of people around the world. Therefore, the economic effects of a changing climate should be known in order to be able to design appropriate policy responses. In the economics literature, one research field empirically analyzes the growth effects of global warming. But often those studies do not account for economic variables that have turned out to be significant in explaining economic growth. In addition, they frequently fail to check for the robustness of their outcomes. This can give rise to biased results regarding the growth process and, therefore, does not necessarily reflect the true data-generating process. Hence, the question comes up: how valid and reliable the results are. Therefore, economic analyses should be undertaken that study the robustness of the results as regards the integration of fundamental economic variables. When policy recommendations are made on how to deal with global warming, we argue that they should be based on robust results only. If that does not hold, economic policy risks being inadequate, giving rise to substantial welfare losses.

Impact of skilled nursing facility quality on Medicare beneficiaries with dementia: Evidence from vacancies.

People living with dementia are less likely to be admitted to high-rated nursing homes than people without dementia, despite their increased care needs. We investigated the effect of admission to nursing homes with higher staffing ratings on adverse outcomes for individuals with and without dementia post-hospitalization. Among Traditional Medicare beneficiaries discharged to nursing homes between 2011 and 2017, we examined the relationship between facility staffing star-ratings and short-term readmission and mortality using an instrumental variables approach to account for selection bias. The instrumental variables were the number of nearby vacant beds in high-rated facilities. Admission to a higher-rated nursing home lowered post-discharge mortality risk at 90 days and reduced 30- and 90-day readmission. Point estimates were larger for people with dementia. Findings underscore the need for enhancing direct care staffing in nursing homes and addressing access disparities, particularly for individuals with dementia who benefit significantly from high-quality care. We assessed how admission to nursing homes with higher staffing ratings impacted outcomes for individuals with and without dementia by exploiting variation in local bed vacancies as a source of quasi-random assignment. For both persons with and without dementia, adjusted short-term mortality and readmission rates were lower among those discharged to nursing homes with higher staffing ratings. Effects were larger for persons with dementia, indicating welfare loss from inequitable access to higher-rated nursing homes. Increasing staffing in nursing homes and reducing disparities for persons with dementia is essential for enhancing both equity and value.

Animal Welfare or Own Welfare: What Motivates Consumers’ Choice of Cage‐Free Products?

ABSTRACTThis study addresses the puzzle of animal welfare regulations consistently passing by majority votes, despite potential welfare losses evident in market data. To understand this phenomenon, we propose a conceptual framework that considers two possibilities: first, animal welfare might not be valued in the market, as suggested by classical externality analysis, and second, it could be valued due to altruistic motivations. To illustrate the framework, we uncover the motives driving consumers’ demand for animal welfare products jointly utilizing the results of a discrete choice experiment and respondents’ perception data obtained in China. Our findings align with the predictions made by classical externality analysis, indicating that the public good aspect of animal welfare is not valued in this market and thereby challenging the existence of altruistic behavior. Moreover, our analysis of consumer heterogeneity reveals that as consumers’ knowledge increases, they exhibit a decreased inclination to prioritize the animal welfare attribute for fulfilling their private needs, and may raise concerns about the safety of animal welfare‐friendly products.

Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry

Abstract We measure the distribution of welfare losses from non-competitive behaviour in the U.S. credit card industry during the 1970s and 1980s. The early credit card industry was characterized by regional monopolies. Ensuing legal decisions led to competitive reforms that resulted in greater, but still limited, oligopolistic competition. We measure the distributional consequences of these reforms by developing and estimating a heterogeneous agent, defaultable debt framework with oligopolistic lenders. The transition from monopoly to oligopolistic competition yields welfare gains equivalent to a one-time transfer worth $3,600 (in 2016 dollars) for the bottom decile of earners (roughly 50% of their annual income) versus $1,200 for the top decile of earners. As the credit market expands, low-income households benefit more since they rely disproportionately on credit to smooth consumption. Greater competition also explains rising bankruptcies, chargeoffs, and credit to income ratios. Lastly, we bound the welfare gains from competition by computing a perfectly competitive benchmark. Aggregate welfare gains are 40% larger from perfect competition but distributed similarly to oligopolistic competition.

Identifying and quantifying the extraterritorial effects of sanctions

We identify the extraterritorial effects of trade sanctions and provide quantitative evidence that they are strong. Additionally, we show that the estimates of the primary effects may be significantly biased if the aforementioned extraterritorial effects are not taken into account. In the context of the U.S. embargo on Cuba, we confirm the presence of large and significant extraterritorial effects that vary across Cuba’s trade partners — most non-sanctioning states trade less with Cuba while its economic allies and states in close proximity to it trade more. Moreover, our complementary general-equilibrium analysis establishes that the U.S.’s sanctions have inflicted large welfare losses on Cuba but their effects on the rest of the world were small. As such, our analysis sheds new light on the significance (in terms of effectiveness) of extraterritorial sanctions and suggests that the motives for the opposition of third countries to such sanctions may be more political and legal than economic.

Not all about the money: Service quality information improves consumer decision-making

Information asymmetries are pervasive in many industries and can result in large losses in consumer welfare. Does providing product quality information result in improved consumer decision-making? We study this question in a market where quality is notoriously hard to determine ex ante: the residential energy market. Using a discrete choice experiment (N = 1,002), we document a substantial willingness-to-pay (37–45 % of the median bill) for four service quality attributes (transparency, agency, authenticity, and convenience). In an incentivized search task (N = 432), we show that how quality information is presented matters: consumers who view information in the form of ratings and stamps of approval are (i) 4 % more likely to opt in to the search task, and (ii) 20 % more likely to correctly identify given levels of quality, relative to consumers who are provided with bar graphs, pie charts, and text. Finally, using a decision experiment (N = 510) with real company names familiar to our participants, we find that the provision of quality information increases choices of the best-rated company more than 20-fold, relative to the control scenario where quality information is absent, in which consumers select companies predominantly on price and brand awareness. Our findings are applicable to other markets in which information asymmetries are present, where policymakers should consider interventions that promote transparency and quality information provision.

Welfare effects of health insurance reform: The role of elastic medical demand

Some medical demand is inelastic to price fluctuations, but not all. This paper examines the role of the price elasticity of medical demand on the welfare effects of public health insurance reform. I develop a computational general equilibrium life-cycle model for heterogeneous agents with varying income, wealth, and health that allows for endogenous medical spending. I calibrate the model for the Japanese economy. If medical spending is totally price-inelastic, increasing copayments will improve the welfare of future generations, but harm all current generations, particularly older people with low income or poor health. In contrast, the welfare gain for newborns is significantly greater in the empirically observed situation where medical spending includes some price-elastic components. Moreover, the reform reduces welfare losses for current individuals and may benefit younger generations.

Trade under lockdown

To curb the effect of the Covid-19 pandemic on public health, many countries around the world introduced lockdown policies in 2020. This paper estimates the effect of these lockdowns on international trade flows using a rich dataset of monthly bilateral trade flows covering over 80% of world trade. We first document that both exporter and importer lockdowns significantly reduced trade flows, that this effect differed substantially across sectors, and has been declining over time. We then decompose this total effect into a direct effect of lockdowns on trade, and an indirect effect that is mediated by a decline in economic activity. Our results indicate that lockdowns reduced trade also conditional on economic activity, suggesting an important increase in trade costs due to lockdowns. A quantification exercise shows that the welfare consequences of these trade costs were sizable, amounting to about one sixth of the welfare loss under a complete return to autarky.

Would carbon tax policy promote real estate prices?

Real estate plays a pivotal role in carbon emissions. Carbon tax policy is a crucial measure for mitigating enterprises' carbon emissions. However, imposing a carbon tax on productive enterprises in the real estate industry to reduce emissions may increase their production costs, which could easily be passed on to buyers, thus inflating real estate prices and impeding policy effectiveness. To examine the impact and negative consequences of carbon tax policy applied to the real estate industry, we develop a dynamic stochastic general equilibrium model encompassing building materials manufacturers, real estate firms, and the environmental regulatory government. Findings indicate that implementing the carbon tax policy significantly reduces carbon emissions in the real estate industry. However, the existence of a price transmission mechanism makes carbon tax policies susceptible to driving up real estate prices. Further welfare analysis shows that increasing carbon tax rates will result in social welfare losses, allowing the government to modify and refine its policy objectives.

WASTEFUL GOVERNMENT SPENDING AND MARKET DISTORTION: AN EMPIRICAL ACCOUNT OF MODERN INTERVENTIONISM’S UNINTENDED CONSEQUENCES IN PUBLIC PROCUREMENT

Wasteful government spending can be seen in the Misesian tradition as a type of interventionism with unintended consequences, such as market distortion and the creation of privilege. An underlying problem that helps the distortion become a tradition is that of ‘wasteful spending cultures’. The latter reflects a hardly identifiable problem in practice, i.e. the creation of welfare losses through public administration practices that are influenced by bureaucratic inertia. The growing acceptance of the compatibility of the Austrian tradition and public policy studies allows for a better understanding of imperfect policies, their consequences, and ways to improve both the process and its result. Using data from government-driven procurement of armored cars in Colombia, this paper illustrates how the distortion of the market mechanism is affected by narrative-driven practices and how special interest groups derive rents at the expense of citizens. Using a cost-effectiveness analysis, the study identifies how a tradition is built around procuring high-end vehicles, portraying a failed central planner in the modern public administration context of a developing country.

WAGE RISK, EMPLOYMENT RISK, AND THE RISE IN WAGE INEQUALITY

AbstractU.S. male residual wage inequality rose, and the employment rate fell between 1983 and 2013. Using a structural labor market model, we show that rising idiosyncratic wage risk and lower taxes at the bottom of the earnings distribution are the main forces behind rising wage inequality. The former contributes to the falling employment rate. Falling real wages and rising disability risk further depressed employment of workers without a college degree and rising exogenous job destruction depressed employment of workers with a college degree. Higher idiosyncratic risk entails large welfare losses with the largest losses among workers without a college degree.

A longitudinal study of the dynamics of Mycoplasma bovis antibody status in primiparous cows and bulk tank milk in Swedish dairy herds

Mycoplasma (M.) bovis is an important pathogen causing pneumonia, mastitis, and arthritis in cattle all over the world entailing reduced animal welfare and economic losses. In this longitudinal study, we investigated the presence of M. bovis antibodies in bulk tank milk (BTM) and in milk from primiparous (PP) cows at 4 sampling occasions over 2 years. Herd characteristics associated with a positive antibody test result in PP cows were investigated. The participating dairy herds (n = 149) were situated in southern Sweden, samples were collected and analyzed with ID Screen antibody ELISA. Information on herd characteristics was retrieved from the national Dairy Herd Improvement database. To identify herd characteristics associated with the presence of antibodies in PP cows, mixed linear regression with herd and sample as random factors were used. The apparent herd-level prevalence of M. bovis infection based on antibodies in BTM was 17% but with the addition of PP cows the prevalence increased to 28%. The results showed that larger herds and introduction of cattle was associated with higher antibody levels in PP cows. In conclusion, this study showed a clear difference in the apparent prevalence of M. bovis infection based on antibodies in BTM or in PP cows, the no. of positive herds were almost doubled when including PP cows. This motivates repeated sampling of a few PP cows to find newly infected herds in an early stage. Finally, the results showed that introduction of cattle influences the level of M. bovis antibodies. This is important in the control and prevention of further spread of the infection. It is essential for free herds to know their M. bovis status and antibody testing is highly recommended if introducing cattle.

Stabilizing financial networks via mergers and acquisitions

A bi-level model is proposed to explore efficient policies for supporting negotiations on financial crisis resolution. In a principal–agent framework, this model minimizes the welfare loss function of a central authority (social planner, SP) through the simultaneous choice of subsidy levels and potential pairs of banks to merge. The SP’s choice of mergers needs to be incentive-compatible with the autonomous choices of banks, and the evaluation of the financial network must adhere to standard accounting principles. Incentive compatibility is enforced by two options for conditions, based on stable matching or competitive bidding. For the evaluation of the financial network, we employ an extended Eisenberg–Noe clearing payment equilibrium by considering bankruptcy costs and the seniority levels of liabilities. Additionally, liabilities are not cleared among solvent banks, and corporate bonds may be used for clearing payments. The bi-level model specifies conditions for the clearing equilibrium. For demonstration, we use major European banks, and a scenario linked to the adverse economic conditions used in the 2016 EU-wide stress testing.

Contribution of road transport infrastructure in mitigating the inward–immiserizing growth in Cameroon: An externality approach in computable general equilibrium analysis

The issue of immiserizing growth has been largely discussed in the literature since 1958. It describes a country context contending with high volume of exports relatively to its imports on the international market that benefits from high economic growth but losses in households’ welfare. This study aims to investigate the contribution of transport infrastructure to tackle immiserizing growth in developing countries, focusing on the Cameroon economy, a contending with a significant lack in the development of road transport infrastructure. Further, the study enriches the debate on the wider economic impacts, closely related to immiserizing growth. The loss of welfare is observed upstream to the investigations, as a response to the application of two types of fiscal policies: the import tariff and the capital income tax. Through a dynamic Computable General Equilibrium (CGE) model, the effect of road transport infrastructure is explored, using the externalities approach. This is an innovative methodology recently applied to access the economic impacts of infrastructure investment making a difference between productive and non-productive infrastructure investments. The findings reveal that productive transport infrastructure not only reduces the wider economic impact by improving households’ welfare but also enhances economic growth. A 10 percent increase in road transport infrastructure investment funded by import tariff leads to a welfare improvement of 1.94% and 1.66% in both short and long terms compared to respective losses of 0.58% and 0.15% if the generated financial funds are allocated in non-productive infrastructure such as monuments, defense etc. The similar tendency is observed for the capital income tax funding. Thus, policymakers are recommended to accentuate the road construction, in order to shorten the complex interplay between public decisions and households’ living conditions.

Can solar water kiosks generate sustainable revenue streams for rural water services?

Providing a sustainable supply of safe drinking water in rural Africa depends on sufficient revenue from user payments to maintain services. While handpumps have been the primary source of drinking water for rural Africans for decades, local revenue generation has been unstable, contributing to service disruptions and welfare losses. We examine the effect of upgrading manual handpumps to solar kiosks in rural Mali from 2019 to 2023. We model 452 monthly records of observed payments and metered water usage to estimate changes in volumetric use and revenue generation. Average revenues increase four-fold indicating stronger financial performance with solar kiosks. In contrast, we find no significant increase in the volume of water people use when a handpump is upgraded to a solar kiosk. We estimate that a 1 °C temperature increase is associated with a $9 increase in average monthly revenue and 366 more litres of water used every day per waterpoint. Our study suggests that rural Malians are more inclined to pay for water from professionally managed solar kiosks. However, seasonal volatility in water demand and uncertainty in the long-term revenue effect suggests caution in assuming solar kiosks are a definitive solution to the nuanced and dynamic nature of water user behaviours in rural Africa.

WELFARE ANALYSIS VIA MARGINAL TREATMENT EFFECTS

We consider a causal structure with endogeneity, i.e., unobserved confoundedness, where an instrumental variable is available. In this setting, we show that the mean social welfare function can be identified and represented via the marginal treatment effect as the operator kernel. This representation result can be applied to a variety of statistical decision rules for treatment choice, including plug-in rules, Bayes rules, and empirical welfare maximization rules. Focusing on the application of the empirical welfare maximization framework, we provide convergence rates of the worst-case average welfare loss (regret).

Climate defaults and financial adaptation

We analyze the relationship between climate-related disasters and sovereign debt crises using a model with capital accumulation, sovereign default, and disaster risk. We find that disaster risk and default risk together lead to slow post-disaster recovery and heightened borrowing costs. Calibrating the model to Mexico, we find that the increase in cyclone risk due to climate change leads to a welfare loss equivalent to a permanent 0.95% consumption drop. However, financial adaptation via catastrophe bonds and disaster insurance can reduce these losses by about 21%. Our study highlights the importance of financial frictions in analyzing climate change impacts.