WELFARE ANALYSIS AND INTERTEMPORAL SUBSTITUTION

This paper explores the structure of welfare comparisons when direct utility is weakly separable over time. The lifetime welfare effect of a reform is then the sum of atemporal Hicksian variations and 'intertemporal variations' reflecting intertemporal substitution. These latter are shown to be of only second-order importance in lifetime welfare comparisons. Approximations to the intertemporal variations when preferences are intertemporally additive are derived, pointing to the welfare significance in this context of not only the intertemporal elasticity of substitution but also within-period income effects. Numerical examples illustrate the analysis and suggest possible orders of magnitude. © 1990.