Estimating Household Responses to Trade Reforms: Net Consumers and Net Producers in Rural Mexico

42 Pages Posted: 13 Sep 2005

See all articles by Guido G. Porto

Guido G. Porto

Universidad Nacional de La Plata - Faculty of Economics

Date Written: September 2005

Abstract

This paper explores an empirical methodology to assess the impacts of trade reforms on household behavior in developing countries. I focus on consumption and income responses: when price reforms take place, households modify consumption and production decisions and local labor markets adjust. The paper proposes a joint estimator of demand and wage price elasticities from survey data. The method uses an empirical model of demand to extract price information from unit values, and uses this information to estimate the response of households to price reforms. By correcting unit values for quality effects and measurement error, the method overcomes the problem of the endogeneity of unit values. By endogeneizing household income, the model corrects potential biases in the estimation of own- and cross-price elasticities in consumption. I apply the method to an expenditure and income survey for rural Mexico. It is shown that the corrections suggested in this paper are empirically important. In particular, I show that allowing for consumption and income responses is a key element of an accurate empirical assessment of trade policy.

Keywords: demand elasticities, wage elasticities, agricultural price reform

JEL Classification: D12 J43 Q17 I30

Suggested Citation

Porto, Guido G., Estimating Household Responses to Trade Reforms: Net Consumers and Net Producers in Rural Mexico (September 2005). World Bank Policy Research Working Paper No. 3695, Available at SSRN: https://ssrn.com/abstract=802828

Guido G. Porto (Contact Author)

Universidad Nacional de La Plata - Faculty of Economics ( email )

1900 La Plata
Argentina

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