Welfare Accounting

This paper develops a welfare accounting decomposition that identifies and quantifies the ultimate origins of welfare gains and losses in general economies with heterogeneous individuals and disaggregated production. The decomposition---exclusively based on preferences and technologies---first separates efficiency from redistribution considerations. Efficiency comprises individual efficiency, which traces gains and losses to reallocating consumption and factor supply across individuals, and production efficiency, which captures allocative efficiency gains and losses due to adjusting intermediate inputs and factors, as well as technical efficiency gains and losses from primitive changes in technologies and factor endowments. Leveraging the decomposition, we characterize efficiency conditions in disaggregated production economies with heterogeneous individuals, extending classic efficiency results. In competitive economies, prices (and wedges) are directly informative about the welfare-relevant statistics that shape the welfare accounting decomposition, which allows us to characterize a generalized Hulten's theorem. We present several minimal examples and a rich application to monetary policy.