42 Pages Posted: 27 Apr 2000
Date Written: September 1992
In order to address several controversies in the application of cost-effectiveness analysis, we investigate the principles underlying the technique and discuss the implications for the evaluation of medical interventions. Using a standard von Neumann-Morgenstern utility framework, we show how a cost-effectiveness criterion can be derived to guide resource allocation decisions. We investigate its relation to age, gender, income level, and risk aversion. Cost-effectiveness analysis can be a useful and powerful tool for resource allocation decisions, but in the presence of heterogeneous preferences and personal characteristics, a cost-effectiveness criterion that is applied at the population level is unlikely to yield pareto-optimal resource allocations.
Suggested Citation: Suggested Citation
Garber, Alan M. and Phelps, Charles E., Economic Foundations of Cost Effective Analysis (September 1992). NBER Working Paper No. w4164. Available at SSRN: https://ssrn.com/abstract=226803