Distributionally Weighted Cost-Benefit Analysis: From Theory to Practice

CPD Discussion Paper No. 364

24 Pages Posted: 19 Dec 2017

See all articles by Thomas van der Pol

Thomas van der Pol

Global Climate Forum; CPB Netherlands Bureau of Economic Policy Analysis

Frits Bos

CPB Netherlands Bureau of Economic Policy Analysis

Gerbert Romijn

CPB Netherlands Bureau of Economic Policy Analysis

Date Written: October 10, 2017

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.

Keywords: Welfare Weights, Inequality Aversion, Cost-Benefit Analysis, Income Redistribution, Child Care Benefits

JEL Classification: D61, D63, H43, H50

Suggested Citation

van der Pol, Thomas and Bos, Frits and Romijn, Gerbert, Distributionally Weighted Cost-Benefit Analysis: From Theory to Practice (October 10, 2017). CPD Discussion Paper No. 364, Available at SSRN: https://ssrn.com/abstract=3090393 or http://dx.doi.org/10.2139/ssrn.3090393

Thomas Van der Pol

Global Climate Forum ( email )

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Frits Bos (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Gerbert Romijn

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

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