Archive for June 29, 2014

EVALUATING THE WELFARE STATE: The Data Needed to Evaluate the Welfare State 3

June 29, 2014

If this assumption is valid, we can safely use nonparticipants to measure what participants would have earned had they not participated, provided we condition on X. Using “ _LL” to denote independence, this identifying assumption is equivalent to Y° _LL D\X. To ensure that (I-la) has an empirical counterpart, we also assume that
over the support of X. This condition assures that both sides of (I-la) are well defined, i.e., that for each X, there are both participants and nonparticipants. For computing counterfactual means, a simpler requirement is:

EVALUATING THE WELFARE STATE: The Data Needed to Evaluate the Welfare State 2

June 27, 2014

As previously noted, the different evaluation criteria require different data for their empirical implementation. Cost-benefit analysis can in principle be performed using a before-after analysis on aggregate time series data. However, if a program has a small impact on the economy and other policies are instituted coincident with the program being evaluated, or if the time series is nonstationary, aggregate data are not a reliable source of information.

The missing counterfactual for cost-benefit criterion (3) is the mean E(Y®), or E(Yt° \D — 1,X) if the evaluation is conducted solely for participants. E(Yt1 \D = 1, X) is produced from data on program participants. Benthamite criterion (2) is more demanding and requires F(y®\X), or F(y® \D = 1,X) if the criterion is defined only for participants. The voting criterion (8) requires F(y],y® |AT), or F{y},y® \D = 1,X) if the criterion is defined only for participants.

EVALUATING THE WELFARE STATE: The Data Needed to Evaluate the Welfare State 1

June 25, 2014

This paper has little to say about estimating preference functions or preference heterogeneity. We refer readers to Heckman (1974a) and the comprehensive survey by Browning, Hansen, Heckman and Taber (1997), who document the empirical importance of preference heterogeneity. Our focus is on estimating the distributions of outcomes across policy states as a first step toward empirically implementing the full criteria. This more modest objective can be fit into the framework of Section 1 by assuming that utilities are linear in their arguments and identical across persons.
This section considers the problem of constructing the distribution of (Y^,Y^), the distribution of potential outcomes within policy regime j in which direct participation is voluntary. Extension of the estimates of this distribution to other policy regimes follows by invoking the assumptions discussed in Section 1. We discuss how the widely-invoked implicit assumption that responses to program treatment are homogeneous across persons greatly simplifies the construction of the joint distribution of potential outcomes and how explicit assumptions about the structure of voluntary program participation rules aids in identifying or reducing the uncertainty about the distributions of outcomes. We consider the information available from cross section data, from social experiments, from panel data and from repeated cross section data.


June 23, 2014

From data on individual program participation decisions, it is possible to infer the implicit valuations of the program made by persons eligible for it. These evaluations constitute all of the data needed for a libertarian program evaluation, but more than these are required to evaluate programs in the interventionist welfare state. For certain decision rules, it is possible to use the data from self-selected samples to bound or estimate the joint distributions required to implement criteria (4) or (7), as we demonstrate below.

The existence of a voluntary participation component for a program under policy j creates an option value which for eligible person i is
For persons interested in the equity of program provisions, it is of interest to examine the dependence between the options offered and the non-participation outcomes, which are assumed to approximate the no-policy outcomes.


June 21, 2014

More precisely, let j be the policy regime we seek to evaluate. Eligible person i in regime j has two potential outcomes: (Y^, Y^), where the superscripts denote nondirect participation (“0”) and direct participation (“1”)- Noneligible persons have only one option: Yjj. These outcomes are defined at the equilibrium level of participation under program j. All feedback effects are incorporated in the definitions of the potential outcomes.
Let subscript “0” denote a policy regime without the program. Let Dji = 1 if person i participates in program j. A crucial identifying assumption that is implicitly invoked in
variables X. The outcome of nonparticipants in policy regime j is the same in the no policy state “0” or in the state where policy j is operative. This assumption is consistent with a program that has “negligible” general equilibrium effects and where the same structure of tax revenue collection is used in regimes j and u0”.

An additional assumption sometimes invoked is that


June 19, 2014

The Domain of the Microeconomic Literature on Self-Selection and “Treatment Effects”

The classical macroeconomic general equilibrium policy evaluation program considered by Knight (1921), Tinbergen (1956), Marschak (1953) and Lucas and Sargent (1981) forecasts and evaluates the impacts of policies that have never been implemented. To do this requires knowledge of policy-invariant structural parameters and a basis for making proposed new policies comparable to old ones.



June 17, 2014

i (2)
Adding uncertainty to the analysis makes it fruitful to distinguish between ex ante and ex post evaluations. Ex post, part of the uncertainty about policy outcomes is resolved although individuals do not, in general, have full information about what their potential outcomes would have been in policy regimes they have not experienced and may have only incomplete information about the policy they have experienced {e.g. the policy may have long run consequences extending after the point of evaluation). It is useful to index the information set Ii by t, 1ц, to recognize that information about the outcomes of policies may accrue over time. Ex ante and ex post assessments of a voluntary program need not agree. Ex post assessments of a program through surveys administered to persons who have completed it (see Katz, Gutek, Kahn and Barton, 1975), may disagree with ex ante assessments of the program. Both may reflect honest valuations of the program but they are reported when agents have different information about it. Before participating in a program, persons may be uncertain of the consequences of participation. A person who has completed program j may know Yj but can only guess at the alternative outcome Yk which they have not experienced. In this case, ex post “satisfaction” for agent i is synonymous with the following inequality:


June 15, 2014

In the literature on welfare economics and social choice, one form of decision-making under uncertainty has been extensively investigated. The “Veil of Ignorance” of Vickrey (1945) and Harsanyi (1955; 1975) postulates that decision makers are completely uncertain about their positions in the distribution of outcomes under each policy, or should act as if they are completely uncertain, and they should use expected utility criteria (Vickrey-Harsanyi) or a maximin strategy (Rawls, 1971) to evaluate their welfare under alternative policies. This form of ignorance is sometimes justified as an “ethically correct” position that captures how an “objectively detached” observer should evaluate alternative policies even if actual participants in the political process use other criteria. An approach based on the veil of ignorance is widely used in practical work in evaluating different income distributions (See Sen, 1973), and requires information only about the marginal distributions of outcomes produced under different policies.

where S’ is a target set toward which the policy is directed, or in terms of a relative requirement compared to a base state к:


June 13, 2014

Conventional cost-benefit analysis assumes that Yj is scalar income and orders policies by their contribution to aggregate income:
Analysts who adopt criterion (3) implicitly assume that outputs are costlessly redistributed among persons via a social welfare function, or else accept GNP as their measure of value for a policy.

While these criteria are traditional, they are not universally accepted and they do not answer all of the interesting questions of political economy or “social justice” that arise in the political arena of the welfare state. In a democratic society, politicians and advocacy groups are interested in knowing the proportion of people who benefit from policy j as compared to policy к:
where “1” is the indicator function: 1(A) = 1 if A is true; 1(Л) = 0 otherwise. In the median voter model, a necessary condition for j to be preferred to к is that PB(j |j, k)> 1 /2. Many writers on “social justice” are concerned about the plight of the poor as measured in some base state k. For them, the gain from policy j is measured in terms of the income or utility gains of the poor. In this case, interest centers on the gains to specific types of persons, e.g., the gains to persons with outcomes in the base state к less than у: Aj^ = Y3i — Yki \ Yki < 2/, or their distribution

or the utility equivalents of these variables. Within a targeted subpopulation, there is sometimes interest in knowing the proportion of people who gain relative to specified values of the base state k:


June 11, 2014

If government is producing a service for which there are good market substitutes, there is no need to resort to an elaborate evaluation procedure for the service. Market prices provide the right measure of marginal gain and cost unless the usual problems of increasing returns, externalities or public perception that private preferences are defective lead to mistrust of the signals produced from the market mechanism. The argument that justifies the welfare state denies the use of prices and private evaluations as the sole criterion for evaluation of governmental activities, but recognizes that they may be relevant inputs into the general policy evaluation process.

The demand for publically-documented evaluations arises from a demand for information by rival parties in a democratic state. Even libertarians who do not accept coercion and who oppose government intervention evaluate policies in order to participate in the political dialogue of the welfare state.
The claims that markets fail or that consumer judgements are faulty are often made without a factual basis. If these claims are false, the case for a welfare state is weakened. In this paper, we accept the reality of the welfare state, without necessarily endorsing the arguments for it. We do not consider the quality of the evidence supporting the premises of the welfare state. Instead, we consider the evaluation of specific policy proposals within its framework.


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