Sharp for SARP: Nonparametric bounds on the behavioural and welfare effects of price changes

Published on 19 September 2012

Sharp nonparametric bounds are derived for Hicksian compensating and equivalent variations. These 'i-bounds' generalize earlier results of Blundell, Browning and Crawford (2008). We show that their e-bounds are sharp under the Weak Axiom of Revealed Preference (WARP). They do not require transitivity. The new i-bounds are sharp under the Strong Axiom of Revealed Preference (SARP). By requiring transitivity they can be used to bound welfare measures. The new bounds on welfare measures are shown to be operationalized through algorithms that are easy to implement.

Sharp nonparametric bounds are derived for Hicksian compensating and equivalent variations. These 'i-bounds' generalize earlier results of Blundell, Browning and Crawford (2008). We show that their e-bounds are sharp under the Weak Axiom of Revealed Preference (WARP). They do not require transitivity. The new i-bounds are sharp under the Strong Axiom of Revealed Preference (SARP). By requiring transitivity they can be used to bound welfare measures. The new bounds on welfare measures are shown to be operationalized through algorithms that are easy to implement.

Authors

Richard Blundell

Richard Blundell

CPP Co-Director

Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.

Martin Browning

Martin Browning

Research Associate University of Copenhagen

Martin is an IFS Research Associate, a Nuffield Senior Research Fellow and a Professor of Economics at the University of Oxford.

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Ian Crawford

Laurens Cherchye

Laurens Cherchye

Research Associate Katholieke Universiteit Leuven

Laurens is a Research Associate of the IFS and a Professor in the Department of Economics, KU Leuven.

Bram de Rock

Research Associate Université libre de Bruxelles

Bram is a Research Associate of the IFS, a Professor of Economics at ULB and a Professor of Mathematics and Statistics at KU Leuven.

Frederic Vermeulen

Frederic Vermeulen

Research Associate University of Leuven

Frederic is a Research Associate of the IFS, a Professor of Economics at the University of Leuven and a Research Fellow at the CEPR.