Econometrica: Sep, 1990, Volume 58, Issue 5

Aggregate Consumer Behavior and the Measurement of Social Welfare

https://doi.org/0012-9682(199009)58:5<1007:ACBATM>2.0.CO;2-U
p. 1007-1040

Dale W. Jorgenson

This paper describes a new approach to normative economics, combining the theory of social choice with econometric modeling of aggregate consumer behavior. We first derive a system of aggregate demand functions by exact aggregation over individual demand functions. We then construct measures of individual welfare from systems of individual demand functions. Finally, we incorporate these measures into a social welfare function, introducing ethical assumptions based on horizontal and vertical equity. To illustrate the application of this approach, we consider the U.S. standard of living and its cost over the period 1947-1985.