Distributionally Weighted Cost-Benefit Analysis: From Theory to Practice

Abstract

In CBA practices around the world, benefits are valued regardless of to whom they accrue. This disregards basic economic principles, like declining marginal utility of income, or inequality aversion. This paper argues that if redistribution matters, net benefits must be aggregated using a distributionally weighted CBA. We introduce the building blocks to do so, i.e. a marginal welfare weight selection, a weight normalization and benefit accounting choices, and an analysis of redistribution effects. A case study about child care benefits in the Netherlands is presented as an illustration. We conclude that guidelines on welfare weights, normalization and practical issues are needed to facilitate experiments with case study applications of marginal welfare weights. We also argue that although distributionally weighted CBA more closely adheres to theoretical foundations, it may be demanding, prone to misuse and might distract attention from the decision problem at hand. Ultimately, welfare weighting could undermine political support for CBA. We end with a summary of other ways to highlight income redistribution in CBAs, like an overview of purchasing power effects. If these are insufficient for informed decision-making, distributionally weighted CBA could be considered as a complementary tool for policies that involve major equity effects.

Predicting social assistance beneficiaries: On the social welfare damage of data biases

“…The inequality aversion parameter is similar to a risk-aversion parameter in an expected-utility framework capturing the trade-off between higher expected payoffs and the uncertainty of those payoffs. 2 The literature usually uses the median consumption or mean consumption as reference; (Kind et al, 2017;Van der Pol et al, 2017), but in this setting, the poverty lines is a more suitable benchmark. As we are looking at relative social welfare changes compared to a perfect targeting benchmark, the choice of the benchmark has no implications for the results in this paper.…”

Should Benefit-Cost Analysis Include a Correction for the Marginal Excess Burden of Taxation?

“…The distributional benefits of the tax system depend on the degree of inequality aversion and the specific method used (see Van der Pol et al, 2017). For some assumptions and methods, the MEB and the distributional benefits are of approximately equal size, but with other assumptions, the MCPF can be larger or smaller than one.…”

“…The second solution requires taking another step, which primarily involves establishing a set of weights for different income groups. van der Pol et al (2017) show that various methods are possible and that for each method also various more operational choices are to be made.…”