Money Metrics in Applied Welfare Analysis: A Saddlepoint Rehabilitation

Abstract

Once a popular tool to estimate welfare changes, the money metric of McKenzie-Samuelson gradually faded from use after welfare theorists and practitioners argued that it led to inegalitarian recommendations. We prove that, at a competitive equilibrium price, any associated competitive allocation maximizes the moneymetric sum; and, as is well understood, competitive allocations can be egalitarian or inegalitarian. The result applies to economies in which individual demand is not rationalizable by any binary relation, let alone a binary relation representable by a utility function, a behavioral setting considered, for example, in Bernheim-Rangel.