The Policy Elasticity


Hendren, Nathaniel. 2016. “The Policy Elasticity.” Tax Policy and the Economy 30.
Paper1.18 MB
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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. 

NBER Working Paper #19177

Last updated on 02/21/2016