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Welfare gains of the poor: An endogenous Bayesian approach with spatial random effects

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Abstract

We introduce a Bayesian instrumental variable procedure with spatial random effects that handles endogeneity, and spatial dependence with unobserved heterogeneity. We find through a limited Monte Carlo experiment that our proposal works well in terms of point estimates and prediction. We apply our method to analyze the welfare effects generated by a process of electricity tariff unification on the poorest households. In particular, we deduce an Equivalent Variation measure where there is a budget constraint for a two-tiered pricing scheme, and find that 10% of the poorest municipalities attained welfare gains above 2% of their initial income.

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