The Curiously Continuing Saga of Choosing the Measure of Welfare Changes

Jack Knetsch

Journal of Benefit-Cost Analysis, 2015, vol. 6, issue 1, 217-225

Abstract: The results of the vast array of willingness to accept compensation/ willingness to pay (WTA/WTP) disparity studies provide strong evidence that people value many losses and reductions of losses, more, and often much more, than otherwise commensurate gains or foregoing of gains. These findings also make it clear that people commonly value many changes not as final states as standard theory assumes, but as positive or negative changes relative to a neutral reference state. Consequently, not only are losses to be most accurately assessed with the WTA measure, but most positive changes that reduce losses are as well. Current practice, which rarely takes such reference dependence into account, is therefore likely to substantially understate the value and importance of projects, policies, and programs that reduce losses. Failing to take the possibilities of valuation disparities into account also appears to undermine other kinds of analyses as well, including, for example, the estimation of elasticities and setting effective levels of Pigouvian taxes.

Date: 2015
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