• Corpus ID: 251066983

An Axiomatic Framework for Cost-Benefit Analysis

@inproceedings{Karapakula2022AnAF,
  title={An Axiomatic Framework for Cost-Benefit Analysis},
  author={Ganesh Karapakula},
  year={2022}
}

• Ganesh Karapakula
• Published 26 July 2022
• Economics

In recent years, the Marginal Value of Public Funds (MVPF) has become a popular tool for conducting cost–benefit analysis; the MVPF relies on the ratio of willingness-to-pay for a policy divided by its net fiscal cost. TheMVPF gives policymakers important information about the equity–efficiency trade-off that is not necessarily conveyed by absolute welfare measures. However, I show in this paper that the usefulness of MVPF for comparative welfare analysis is limited, because it suffers from several empirically important economic paradoxes and statistical irregularities. There are also several practical issues in using the MVPF to aggregate welfare across policies or across population subgroups. To address these problems, I develop a new axiomatic framework to construct a measure that quantifies the equity–efficiency trade-off in a better way. I do so without compromising on the core features of the MVPF: its unit-free property, and the main preference orderings underlying it. My axiomatic framework delivers a unique (econo)metric that I call the Relative Policy Value (RPV), which can be weighted to conduct both comparative and absolute welfare analyses (or a hybrid combination thereof) and to intuitively aggregatewelfare (without encountering the issues inMVPF-based aggregation). I also propose computationally convenient methods to make uniformly valid statistical inferences on welfare measures. After reanalyzing several government policies using my new econometric methods, I conclude that there is substantial economic and statistical uncertainty about welfare of some policies that were previously reported to have very high or even “precisely estimated infinite” MVPF values. ∗The Janeway Institute, Faculty of Economics, The University of Cambridge. Email: [e-mail]. I first and foremost thank Nathan Hendren and Ben Sprung-Keyser for providing extremely helpful feedback on this paper, for explaining the historical development of this research area, for kindly sharing their resources (including their fully replicable code and data), and for being generous with their time to help me build on their highly influential paper. I thank Don Andrews, Zheng Fang, Hiro Kaido, and Jessie Li for feedback on uniformly valid statistical inference methods. I am very grateful to Oliver Linton and Melvyn Weeks for providing immensely beneficial constructive critiques and suggestions that have vastly improved this paper and my other related research. I also thank Michael Ashby, Debopam Bhattacharya, Matt Elliott, Eric French, Alexei Onatski, Debraj Ray, Ariel Rubinstein, Mikhail Safronov, Liyang Sun, and Wei Xiong for their insightful questions and comments that helped me refine and expand my framework. In addition, I thank Laura Araújo de Freitas and Shane Mahen for useful comments. I gratefully acknowledge financial support from the Janeway Institute for my research. This paper previously circulated last year under an abstruse title: “A Double Staircase Index for Welfare Analysis.” I previously gave the name “Double Staircase Index” (DSI) to my cost–benefit measure, the “Relative Policy Value” (RPV), because the RPV bears strong visual resemblance to an interesting type of architectural design called the double staircase. However, I have since decided to leave architecture out of this paper for now! 1 ar X iv :2 20 7. 13 03 3v 1 [ ec on .G N ] 2 6 Ju l 2 02 2