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We provide a novel inferential framework to estimate the exact affine Stoneindex (EASI) model, and analyze welfare implications due to price changescaused by taxes. Our inferential framework is based on a non-parametricspecification of the stochastic errors in the EASI incomplete demand systemusing Dirichlet processes. Our proposal enables to identify consumer clustersdue to unobserved preference heterogeneity taking into account, censoring,simultaneous endogeneity and non-linearities. We perform an application basedon a tax on electricity consumption in the Colombian economy. Our resultssuggest that there are four clusters due to unobserved preferenceheterogeneity; although 95% of our sample belongs to one cluster. This suggeststhat observable variables describe preferences in a good way under the EASImodel in our application. We find that utilities seem to be inelastic normalgoods with non-linear Engel curves. Joint predictive distributions indicatethat electricity tax generates substitution effects between electricity andother non-utility goods. These distributions as well as Slutsky matricessuggest good model assessment. We find that there is a 95% probability that theequivalent variation as percentage of income of the representative household isbetween 0.60% to 1.49% given an approximately 1% electricity tariff increase.However, there are heterogeneous effects with higher socioeconomic stratafacing more welfare losses on average. This highlights the potential remarkablewelfare implications due taxation on inelastic services.

Semi-parametric estimation of the EASI model: Welfare implications of taxes identifying clusters due to unobserved preference heterogeneity