Implementing Cost-Benefit Analysis When Preferences are Distorted

42 Pages Posted: 30 Nov 1999

See all articles by Matthew D. Adler

Matthew D. Adler

Duke University School of Law

Eric A. Posner

University of Chicago - Law School

Date Written: November 1999

Abstract

Cost-benefit analysis is routinely used by government agencies in order to evaluate projects, but it remains controversial among academics. The standard defense appeals to the Pareto standard or the Kaldor-Hicks standard, and assumes that agencies should respect people's actual preferences, as opposed to informed or otherwise restricted preferences. This paper argues that cost-benefit analysis is best understood as a welfarist decision procedure, and its most plausible defense is that use of cost-benefit analysis is more likely to maximize overall well-being than is use of alternative decision-procedures. The paper focuses on the problem of using cost-benefit analysis when preferences are "distorted." A person's preferences are distorted when their satisfaction does not enhance that person's well-being. Preferences typically thought to be distorted in this sense include disinterested preferences, uninformed preferences, adaptive preferences, and objectively bad preferences; further, preferences may be a poor guide to maximizing aggregate well-being when wealth is unequally distributed. We argue that government agencies currently recognize these problems but respond to them in an ad hoc way, and that a more systematic treatment of these problems is warranted. The paper describes conditions under which agencies should (or should not) correct for distorted preferences, for example, by constructing informed or non-adaptive preferences, discounting objectively bad preferences, and treating people differentially on the basis of wealth. Institutional and political constraints - the inability of agencies to make lump sum transfers, the need for transparency - are also considered.

Suggested Citation

Adler, Matthew D. and Posner, Eric A., Implementing Cost-Benefit Analysis When Preferences are Distorted (November 1999). U Chicago Law & Economics, Olin Working Paper No. 88; and U of Penn, Inst for Law & Econ Research Paper 277. Available at SSRN: https://ssrn.com/abstract=194571 or http://dx.doi.org/10.2139/ssrn.194571

Matthew D. Adler (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Eric A. Posner

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

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