Survey nonresponse has risen in recent years, which has increased the share of imputed and underreported values found on commonly used data sets. While this trend has been well documented for earnings, the growth in nonresponse to government transfers questions has received far less attention. We demonstrate analytically that the underreporting and imputation of transfer benefits can lead to program impact estimates that are substantially overstated when using instrumental variables methods to correct for endogeneity or measurement error in benefit amounts. We document the importance of failing to account for these issues using two empirical examples.

We estimate the intertemporal elasticity of substitution in consumption (IES) using a preannounced increase in Japan’s consumption tax rate. Because this tax is highly comprehensive, the rate increase was announced prior to its implementation, and because other factors that affect the real interest rate were constant, the tax rate increase presents an ideal natural experiment to estimate the IES. A Japanese monthly household survey is exploited to accurately categorize nondurables, and our empirical specification addresses intratemporal substitution bias. We find that the IES is 0.21 and not significantly different from 0, but it is significantly less than 1.