Parametric and Non-Parametric Approaches to Price and Tax Reform

Abstract

In the analysis of tax reform, when equity is traded off against efficiency, the measurement of the latter requires us to know how tax- induced price changes affect quantities supplied and demanded. In this paper, we present various econometric procedures for estimating how taxes affect demand. We examine advantages and disadvantages of parametric methods of tax reform analysis and suggest that the nonparametric `average derivate estimator' is a useful alternative. We apply both parametric and nonparametric methods to analyze possible price reform for foods in rural Pakistan, and discuss the issues that remain to be dealt with in empirical welfare analyses.