NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Policy Elasticity

Nathaniel Hendren

NBER Working Paper No. 19177
Issued in June 2013
NBER Program(s):   DEV   HC   HE   LS   PE

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 for 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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This paper was revised on January 22, 2014

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Document Object Identifier (DOI): 10.3386/w19177

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