NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Policy Elasticity

Nathaniel Hendren

Chapter in NBER book Tax Policy and the Economy, Volume 30 (2016), Jeffrey R. Brown, editor
Conference held September 24, 2015
Published in June 2016 by University of Chicago Press
© 2016 by the National Bureau of Economic Research
in NBER Book Series Tax Policy and the Economy

This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, I term them policy elasticities, to distinguish them from Hicksian and Marshallian elasticities. The model also formally justifies a simple benefit-cost ratio to measure the marginal value of public funds corresponding to non-budget neutral policies. Using existing causal estimates, I apply the framework to five policy changes: top income tax rate, EITC generosity, food stamps, job training, and housing vouchers.

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Document Object Identifier (DOI): https://doi.org/10.1086/685593

See also NBER working paper w19177, The Policy Elasticity, Nathaniel Hendren
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