PARAMETRIC AND NONPARAMETRIC APPROACHES TO PRICE AND TAX-REFORM

In many public policy problems, we need to estimate the way in which p olicy changes affect people's behavior. In the analysis of tax and sub sidy reform-the topic of this article-we need to know how tax-induced price changes affect the amounts that people buy of the taxed goods. W e present various economic and statistical approaches to obtaining the required estimates. We consider the standard structural methods in ec onomics, where the behavior and welfare of individual agents are captu red simultaneously by the specification of utility functions whose par ameters are to be estimated. We argue that these methods are less usef ul than alternatives that directly consider the derivatives of the re, regression function of average behavior. We consider both parametric a nd nonparametric estimators of these derivatives in the context of pri ce reform For foods in Pakistan, focussing on the advantages and disad vantages of ''average derivative estimation'' (ADE). ADE is attractive in principle, because it directly estimates the statistics required f or policy analysis. In the practical case considered here, neither tec hnique is a clear winner; each has strengths and weaknesses.