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CHICAGO
JOHN M. OLIN LAW & ECONOMICS WORKING PAPER NO. 88
(2
D SERIES)
Implementing Cost-Benefit Analysis
when Preferences are Distorted
Matthew D. Adler and Eric A. Posner
THE LAW SCHOOL
THE UNIVERSITY OF CHICAGO
Implementing Cost-Benefit Analysis When Preferences Are Distorted
Matthew D. Adler
1
and Eric A. Posner
2
Cost-benefit analysis (CBA) is widely and increasingly used by government agencies, yet
academic debate about CBA is in disarray. Defenders of CBA traditionally conceptualize it as a
technique for implementing either Pareto-efficiency or Kaldor-Hicks efficiency, two criteria that
many welfare economists take to be normatively basic. They also traditionally define Pareto-
efficiency, Kaldor-Hicks efficiency, and CBA in terms of a person’s actual, as opposed to
informed or otherwise undistorted, preferences. A project is (1) Pareto-efficient relative to the
status quo, if at least one person actually prefers it to the status quo and no one prefers the status
quo; (2) Kaldor-Hicks efficient relative to the status quo, if there is a hypothetical costless
redistribution from those who prefer the project, to those who do not, that would make the project
Pareto-efficient. A project is a CBA-improvement over the status quo, if the sum of compensating
variations for the project is a positive number, where P’s compensating variation (CV) for a project
is the dollar amount paid to or from him in the project world such that – given P’s actual
preferences – he is indifferent between that world and the status quo. The academic critics of CBA
argue that actual preferences are a poor basis for governmental policy. They further argue that the
link between CBA and Pareto-efficiency is tenuous; and that the link between CBA and Kaldor-
Hicks efficiency, although tighter, does not justify CBA, because Kaldor-Hicks itself lacks
normative significance.
The critics are right, up to a point. The traditional defense of CBA is a failure. Where the
critics go wrong is in thinking that this is a failure of CBA, rather than merely of a particular
argument in its favor. As we have elsewhere tried to show, CBA is properly conceptualized as a
welfarist decision-procedure. The proper link is to the normative criterion of overall well-being,
rather than to Pareto-efficiency or Kaldor-Hicks efficiency, where overall well-being refers to the
satisfaction of certain restricted preferences, rather than all actual preferences. (We will discuss the
restrictions below.) By overall well-being we mean to include the large family of welfarist (but not
necessarily utilitarian) moral and political theories, that is, those that hold that a policy’s effect on
people’s welfare is a morally relevant, though not necessarily conclusive, consideration. The link
between CBA and overall well-being is rough, not perfect: sometimes a project will be picked out
by CBA as an improvement over the status quo and yet, in fact, be welfare-inferior to the status
quo. But CBA is sufficiently accurate in tracking overall well-being, and has sufficient other
procedural virtues – it is relatively cheap to implement, relatively easy to monitor by oversight
bodies, and relatively undemanding of agency expertise – that it is plausibly the welfare-
maximizing procedure for agencies to employ, in a significant fraction of their choice situations,
compared to available alternative procedures.
The problem with the traditional definition of CBA in terms of actual preferences is that
satisfaction of actual preference and maximization of well-being are not equivalent. But we think
that the failure of the actual-preference view of well-being need not undermine CBA. In the course
of defending this position, we will use the following vocabulary. CBA can be redefined as the
1
University of Pennsylvania Law School.
2
University of Chicago Law School. We thank Andrei Marmor, Cass Sunstein, Adrian Vermeule, and
participants at this conference and at workshops at the University of Southern California and the University of
Toronto, for helpful comments, and Kate Kraus and Bruce McKee for valuable research assistance. Posner also
gratefully acknowledges the financial support of the John M. Olin Fund, the Sarah Scaife Foundation Fund, and the
Ameritech Fund in Law and Economics.
Chicago Working Paper in Law and Economics 2
sum of welfare equivalents (WEs) rather than the sum of CVs, where P’s WE is the amount of
money such that – paid to or from him in the project world – he is just as well off as in the status
quo, on the correct theory of well-being. Thus defined, CBA is agnostic across theories of well-
being, and in particular is not committed to the view that welfare and actual-preference-satisfaction
are equivalent. Because of this, when we discuss WEs, we will often not have a fixed number or
formula in mind; the concept of WE (unlike the concepts of CV and equivalent variation, for
example) is used as a placeholder to describe what dollar amount would be necessary under a given
theory, or cluster of theories, of well-being. Nonetheless, even without making strong
assumptions about the right theory of well-being, we will be able to derive some restrictions on
how WEs are determined.
The concept of WE is necessary because the actual preference theory of CBA must be
abandoned. Actual preferences are not necessarily constitutive of welfare because they can be
distorted, in various ways. For example, P may prefer the project to the status quo because he is
uninformed; with fuller information, he would prefer the status quo. Or, P’s preference for the
project may not track relevant criteria of objective value. The project harms innocent children; P,
who is a sadist, prefers the project just because it does that, and he retains this despicable
preference under full information. In these kinds of cases, traditional CBA equates the welfare
impact of the project upon P to his CV, which is a positive number. Yet most people would agree
that the ignorant or sadistic P, who prefers the project only in virtue of his ignorance or his sadism,
should not be counted as a project beneficiary, who helps tip the cost-benefit scale in the project’s
favor. But how should the project’s welfare impact upon P be calculated? At first glance, the
correct agency response to the problem of distorted preferences seems to be to ask what P would
hypothetically be willing to pay or accept if his preferences were relevantly undistorted (well-
informed, non-sadistic), and use that number rather than P’s CV in the cost-benefit calculus. The
problem here is that P continues to have his actual preferences, not his hypothetical preferences,
and his actual preferences – on the right theory of well-being – may have a significant effect on his
welfare. If P remains ignorant, and continues to prefer the project to the status quo, then the fact
that he would (under full information) have a valuation of, say, -$100 for the project hardly means
that the actual welfare effect of the project is -$100. And similarly for the sadistic P.
So agencies face a dilemma. On the one hand, CVs defined in terms of actual preferences
deviate from welfare, when such preferences are distorted. On the other hand, hypothetical
valuations in light of undistorted preferences may not capture the real welfare impact of projects
either. This Article takes a stab at solving that dilemma. The glib answer is that agencies should
aggregate WEs, not CVs or hypothetical CVs. But this glib answer is really just a promissory
note, because it remains to be seen how actual and undistorted preferences interact, for various
kinds of distortions, to produce WEs. A further problem, which also needs to be confronted, is
that the sum-of-WEs can deviate substantially from overall well-being because the marginal utility
of dollars depends upon the wealth of the person affected. (This is a well-known problem for
conventional CBA based on CVs; the use of WEs does not by itself solve this problem.) The glib
response here is that WEs should be weighted by a factor inversely proportional to wealth. As we
discuss in more detail below, that response overlooks the point that rich and poor people behave in
accordance with their actual wealth, not their hypothetical wealth.
Part I of the Article lays out, in compressed form, our view of CBA as a welfarist decision-
procedure, and further clarifies the idea of a WE.
3
Part II surveys agency practice and
3
Part I is based on Matthew D. Adler and Eric A. Posner, Rethinking Cost Benefit Analysis, 109
Yale L.J. 167 (1999), which contains further details and citations to the literature.
3 Implementing Cost-Benefit Analysis When Preferences Are Distorted
demonstrates that agencies performing cost-benefit analysis do, in fact, adjust valuations to correct
for various kinds of preference distortions. Part III analyzes how agencies should adjust
valuations to correct for preference distortions. We focus upon the five most important scenarios
in which traditional CBA (the sum of unweighted CVs) and overall well-being may diverge:
disinterestedness, poor information, adaptation to circumstances, objectively bad preferences, and
wealth effects. For the first four scenarios, we discuss in detail how WEs can diverge from CVs
and how WEs should be calculated; for the last scenario, wealth effects, we analyze various subtle
problems associated with the form of CBA that weights WEs or CVs to reflect the declining
marginal utility of income. Part IV addresses some institutional issues. Part V summarizes our
views, and presents concrete recommendations as to when agencies should depart from traditional
CBA.
I. CBA: The Traditional Defenses, and a New One
CBA is traditionally linked to the familiar economic criteria of Pareto-efficiency or Kaldor-
Hicks efficiency. A project is Pareto-efficient, relative to the status quo, if no one loses from the
project and at least one person gains. A project is Kaldor-Hicks efficient, relative to the status quo,
if there is a hypothetical costless lump-sum redistribution in the project world, from winners to
losers, such that this amended project world is Pareto-efficient relative to the status quo.
4
The
concepts of welfare “loss” and “gain,” as referenced by these criteria, are standardly cashed out in
terms of preference-satisfaction. P gains from a project, and loses from the status quo, if and only
if he prefers the project. There are real difficulties in the equation of preference-satisfaction and
welfare, which we shall discuss in a moment. But even apart from such difficulties, the putative
link between CBA and economic efficiency – either in the Pareto sense or in the Kaldor-Hicks
sense – is one that needs to be broken.
Pareto-efficiency has genuine normative import. An agency does the right thing,
everything else equal, by approving a Pareto-efficient project. But the connection between CBA
and Pareto efficiency is elusive. An individual project will be chosen by CBA over the status quo
even though the project is not Pareto-efficient relative to the status quo, as long as the aggregate
CVs of those who gain from the project exceed the aggregate CVs of those who lose. The very
idea behind CBA is to commensurate winners’ gains and losers’ losses, such that the project can
be identified as better or worse even though neither option is Pareto-efficient relative to the other.
Nor can CBA be justified in light of Pareto efficiency by claiming: (1) that project winnings will be
redistributed through the tax system to project losers, since agencies employ CBA in many
scenarios where no such redistribution will take place; (2) that a general policy of CBA is Pareto-
efficient for all affected, since agencies regularly employ CBA to impose losses sufficiently grave
(for example, death or injury) that the persons thus affected would be better off in a world with no
4
Technically, there is a difference between Kaldor-efficiency, Hicks-efficiency, and Kaldor-Hicks efficiency.
A project is (1) Kaldor-efficient relative to the status quo if there is a hypothetical lump-sum redistribution in the
project world, from project winners to project losers, such that this amended project world is Pareto-efficient relative
to the status quo; (2) Hicks-efficient relative to the status quo, if there is no hypothetical lump-sum redistribution in
the status quo world, from project losers to project winners, such that this amended status quo world is Pareto-
efficient relative to the project; and (3) Kaldor-Hicks efficient if the project is Kaldor-efficient and Hicks-efficient.
(The last criterion is also called the Scitovsky criterion.) For purposes of exposition, we adopt a simpler definition
of Kaldor-Hicks efficiency in the text and focus upon what is, technically, Kaldor efficiency. Our arguments readily
carry over to Hicks efficiency and to Kaldor-Hicks efficiency in the technical sense; none of the three criteria have
genuine normative import.
Chicago Working Paper in Law and Economics 4
such policy;
5
and (3) that persons would choose a general policy of CBA if they were choosing ex
ante and under conditions of uncertainty, since there are good arguments that persons in such
circumstances would choose a different policy.
6
As for Kaldor-Hicks efficiency, that criterion lacks genuine normative import. The fact that
the project winners could compensate the project losers entails nothing of normative significance
about the project. A project can be a Kaldor-Hicks improvement, relative to the status quo,
without increasing overall well-being – for example, if the project produces a large increase I in the
resource endowment of richer persons, and a smaller decrease D in the resource endowment of
poorer persons, such that I > D (making the project Kaldor-Hicks efficient) but the welfare impact
of I is less than the welfare impact of D. Nor should Kaldor-Hicks be thought to have normative
significance apart from welfare-maximization. For example, any normative link to the powerful
notion of consent is vitiated by the crucial point that it is hypothetical winner-to-loser
compensation, not actual winner-to-loser compensation, that makes a project Kaldor-Hicks
efficient. The fact that the losers would or should consent to the efficient project, if the
redistribution from winners to losers were performed, does not mean that the losers do or should
consent to the project where no such redistribution actually takes place.
In short, the fact that a project with a positive total sum-of-CVs, relative to the status quo,
is Kaldor-Hicks efficient relative to the status quo does not explain why the agency ought to
choose the project. Further, it turns out that – for technical reasons – a project can have a positive,
total sum-of-CVs relative to the status quo and not be Kaldor-Hicks efficient.
7
CBA needs to be reconceptualized. The way to do so is twofold. First, CBA itself must be
recognized to lack normative significance.
8
The fact that a project has a positive sum-of-CVs does
not mean that it is a genuine moral improvement over the status quo.
9
Rather, CBA is a decision-
5
Note further that, because CBA inflates the welfare effect of projects on rich persons and deflates the
welfare effect on poor persons, poor persons might also be better off in a world without the practice of CBA.
6
Harsanyi famously argues that persons choosing ex ante and under conditions of uncertainty would choose
a policy of welfare-maximization. See John C. Harsanyi, Morality and the Theory of Rational Behavior, in
Utilitarianism and Beyond 39 (Amartya Sen & Bernard Williams eds. 1982). But welfare-maximization is different
from CBA. See infra text accompanying note __.
7
See Robin W. Boadway, The Welfare Foundations of Cost-Benefit Analysis, 84 Econ. J. 926 (1974).
8
Perhaps it is an exaggeration to describe this particular element of our view of CBA as a
“reconceptualization.” Sophisticated contemporary defenders of CBA, within welfare economics, view it as a
decision-procedure that imperfectly implements either Pareto-efficiency or Kaldor-Hicks efficiency. But our overall
view of CBA clearly is a reconceptualization; and seeing CBA as a decision-procedure rather than a bedrock
normative criterion is an important component of our overall view.
9
The reason that CBA lacks normative significance is parallel to the reason that Kaldor-Hicks efficiency
does. A project may produce gains for the rich (whose CVs are inflated by their wealth) and losses for the poor
(whose CVs are deflated by their poverty), such that it is counted as an improvement by CBA even though the
project decreases overall well-being. So CBA is not equivalent to the welfare criterion. And, as with Kaldor-Hicks
efficiency, it is very hard to see how CBA could have moral significance by tracking or constituting some moral
5 Implementing Cost-Benefit Analysis When Preferences Are Distorted
procedure. It is a technique used by agencies for choosing between options, a technique whose
justifiability must be evaluated in light of normative criteria with which CBA is only contingently
connected.
Second, there is a genuine normative criterion that does plausibly justify the use of CBA,
and that is the criterion of overall well-being. It is this criterion, not Pareto-efficiency or Kaldor-
Hicks efficiency, that provides the normative foundations for CBA. Overall well-being is one of
the several normative criteria bearing upon governmental choice; it is morally relevant to, if not
conclusive of, government’s choice between a project and the status quo. Thus we disagree with
classical utilitarianism, which is the view that overall well-being is the sole criterion bearing on
governmental choice. Our view is that the government should choose a welfare-improving project
unless other considerations, such as deontological or egalitarian considerations, justify rejecting the
welfare-improving project and choosing the status quo instead. How such non-welfarist
considerations should be operationalized at the agency level is a complicated matter. It may be the
case that an institutional division of labor obtains, where agencies focus solely on the welfare
criterion and courts and legislatures then revise agency choices in light of deontological criteria,
egalitarian criteria, and the like. In any event, we do not mean to suggest that CBA is a super-
procedure, which implements all the moral considerations bearing upon governmental choice.
Rather, CBA is plausibly justified in light of a particular moral criterion – overall well-being – and
thus is plausibly one part of the set of procedures and institutions comprising government.
Note that our view, albeit non-utilitarian, does entail a commitment to the possibility of
interpersonal welfare comparisons. It was once a widely held view within welfare economics that
such comparisons are impossible – that Pareto-noncomparable states are welfare-noncomparable.
That view has changed, and in any event is wrong. Consider a project that causes minor
headaches to a few people, but averts many premature deaths. The project is Pareto-
noncomparable with the status quo, but surely it increases overall well-being. In our ordinary
lives, as family members or citizens, we routinely judge that the positive (or negative) welfare
effect of an option on some person or persons is large enough to outweigh the negative (or
positive) welfare effect of the option on others. Any theory of well-being that does not license
such comparisons is, on those very grounds, an unreasonable theory.
10
Granting the moral relevance of overall well-being, and the possibility of interpersonal
welfare comparisons, why think that CBA is a decision-procedure justified in light of overall well-
being? There are a variety of possible decision-procedures by which agencies might choose
between their options. One such procedure is CBA; another procedure is the direct implementation
of the welfare criterion, where agencies actually attempt to judge whether overall well-being is
greater in the project world or the status quo; yet another procedure is one where agencies pick a
single dimension bearing upon welfare (such as longevity, or aesthetic experience, or employment)
and choose options by maximizing along that single dimension. Or, an agency might eschew
criterion other than the welfare criterion.
10
Skeptics of interpersonal welfare comparisons sometimes point out that it is not practicable for
government to make such comparisons. We agree. But this is not the same as saying that interpersonal comparisons
are impossible. To think otherwise is just to conflate decision-procedures and normative criteria. Although actual
agencies should not choose between project and status quo by attempting to perform a comparison of the winners’
welfare gains with the losers’s losses – because that procedure is too expensive, etc. – there remains, or may remain,
a right answer to the question, “Are the winners’ welfare gains larger than the losers’ losses?”
Chicago Working Paper in Law and Economics 6
maximization and aggregation entirely, as agencies do when they make choices by looking to
social norms. Why think that CBA, by contrast with these other procedures, is the best procedure
for agencies to use – the procedure the use of which maximizes overall well-being? Our view is
actually a bit more qualified: although there are some scenarios in which agencies should not
employ CBA (e.g., where the project’s likely impact on overall well-being is too small to warrant
the expense of CBA), CBA is welfare-justified in a significant fraction of agency choice situations.
By contrast with unidimensional and non-aggregative procedures, CBA is relatively accurate –
although not perfectly accurate – in tracking overall well-being. By contrast with direct
implementation of the welfare criterion, CBA is cheaper to perform, less prone to agency error,
and more readily monitored by oversight bodies such as legislatures or the Office of Management
and Budget (OMB).
These are surely contestable and (to some extent) empirical claims, which bear further
examination and debate. But at a minimum it is clear to us what the debate about CBA should
concern: it should concern whether, as compared with other possible agency procedures, CBA is
the procedure by which the welfare criterion is best implemented. Again, it is welfare not
efficiency that figures here, and it must be kept firmly in mind that although CBA itself lacks
normative import, its use as a decision-procedure may be better justified in light of some genuine
normative criterion than the direct implementation of that criterion.
The reader, by this point, may have noticed one large lacuna in our sketch of the welfarist
justification for CBA. That concerns the link between CBA and actual preferences. CBA is
traditionally defined as the sum of CVs, and CVs in turn are defined in terms of actual preference.
P’s CV is the dollar amount such that, paid to or from him in the project world, he is indifferent –
given his actual preferences – between that world and the status quo. But there are many reasons
to think that an actual-preference account of welfare is wrong. At a minimum, that account is
wrong because it treats disinterested or morally motivated preferences as welfare-relevant. A
preference is simply a particular kind of ranking (specifically, a ranking by P that has some
explanatory connection to P’s choices). But if P prefers (ranks) the project over the status quo
simply because he believes the project to be morally required, then surely the occurrence of the
project need not benefit P. To think otherwise is to confuse the totality of factors that influence P’s
rankings and choices – including his moral views, his special commitments to family and friends,
and so forth – with one such factor, namely P’s welfare.
11
An example might help make the point. Imagine that the project, which would be
implemented in Montana, involves eliminating an endangered species located in that state. P, who
lives in New York, believes that this is morally wrong because he believes that endangered species
have intrinsic value. P has no other involvement with the species, or Montana. He has never been
to that state, and never plans to go. His professional work has nothing to do with the
environmental movement, and he has no particular non-professional involvement either: he does
not devote large amounts of his time, or resources, or attention to environmental issues. Still, he
has been persuaded (after reading a book on environmental ethics) that there are strong moral
grounds against eliminating endangered species. He therefore rejects the project; he ranks it below
the status quo; and this ranking is connected to his choices, in the sense that it leads him (let us
11
Sen distinguishes preferences based on “commitment”; Harsanyi distinguishes “ethical preferences.” See
Amartya Sen, Rational Fools, 6 Philosophy & Pub. Affairs 317 (1977); J. Harsanyi, Cardinal Welfare,
Individualistic Ethics, and Interpersonal Comparisons of Utility, 63 J. Pol. Econ. 315 (1955). Other works
defending the view that only a restricted set of preferences are relevant for well-being – that some preferences can be
disinterested – are cited in Adler and Posner, supra note __, at ___.
7 Implementing Cost-Benefit Analysis When Preferences Are Distorted
imagine) to take certain steps to help the species, such as sending a $100 check to the Sierra Club.
This hardly entails that P personally benefits from the status quo – that the project harms his own
welfare. After all, P himself would deny that claim, and it would run afoul of our commonsense
intuitions about welfare. P rejects the project not because he believes it harms him, but because he
believes that the project is morally wrong; and there is nothing driving P’s preference, no personal
or professional connection, other than this belief. Thus P’s act of sending the check to the Sierra
Club is disinterested: it is an action that diminishes P’s own well-being (because he loses $100)
and that he takes to do so, but which is motivated by considerations other than P’s own well-
being. If welfare and preference-satisfaction are equivalent, then the concept of disinterested action
is incoherent.
We therefore adopt a “restricted” preference-based account of well-being. A project is a
welfare-improvement for P only if P prefers the project and only if this preference is properly
“restricted” to P’s own interests, concerns, and welfare. Providing a precise account of this
restriction is difficult, but it is clear that some such amendment to the actual-preference account of
welfare is needed – as the case of morally motivated preferences shows.
More generally, there are a variety of scenarios in which – theorists of well-being have
plausibly proposed – P does not benefit or fully benefit from a project even though he actually
prefers it. There are variety of factors, other than actual preference, that may bear upon P’s
welfare. These factors include the following.
Information. P prefers the project. However, with fuller information, P would
prefer the status quo. Arguably, P is not benefited by the project, or at least not
benefited as much as he would be if his fully-informed preferences were in favor of
the project.
Objective Good. P prefers the project. However, the status quo is objectively
much better for P, in light of objective welfare goods such as friendship,
knowledge, aesthetic experience, or accomplishment. Arguably, P is not benefited
by the project, or at least not benefited as much as he would be if the objective value
of the project were greater.
Adaptive Preference. P prefers the status quo because that is the world in which his
preferences were formed. However, P’s preferences are misshapen by various
unjust features of the status quo. (Imagine that the status quo is a world in which P
lacks wealth, or self-respect, or a basic education, and in which his preferences
have been shaped by these deficits.) If the project is implemented, P’s preferences
may change – such that he now prefers the project, not the status quo – or the
preferences may be sufficiently entrenched that they do not change. In either event,
there may be good grounds for thinking that P benefits from (or at least is not
harmed by) the project even though he prefers or once preferred the status quo.
Affect and Experience. P prefers the project. However, if the project were
implemented, he would not enjoy it. Or, if the project were implemented, he would
not experience – become aware of – that fact. (Note that P’s preference for a
world-state is satisfied if the world-state occurs; it is a further and contingent matter
whether P experiences the occurrence of the world-state.) Arguably, P cannot be
benefited by a project that he does not enjoy or experience.
We are not sure that the actual-preference view of well-being needs to be modified in all the
Chicago Working Paper in Law and Economics 8
ways just listed. These are plausible proposals, but we find them somewhat less compelling than
the earlier point that morally-motivated and other “unrestricted” preferences are welfare-irrelevant.
On the other hand, we are hardly confident that the right theory of well-being omits reference to
P’s information, to the objective goods that he realizes, to the adaptive cast of his preferences, or to
his affect and experience. Thus we need to provide a defense of CBA that is consistent with such
amendments to an actual-preference view of welfare.
One defense returns to the point that CBA is a decision-procedure, not a normative
criterion. P’s CV does not perfectly capture the welfare effect of the project upon him, given the
disjunction between the actual-preference view of welfare and the correct view – a restricted-
preference view that may further incorporate factors such as information, objective goods,
adaption, and affect or experience. But perfect capture is not needed. CVs are sufficiently accurate
in tracking welfare impacts, and sufficiently easy to implement and monitor by agencies that CBA
as traditionally defined is welfare-justified in light of the right theory of welfare, notwithstanding
the disjunction from the actual-preference view. Or so the argument in favor of traditional CBA
might go.
This argument may be persuasive, at least in part. There may well be scenarios in which
traditionally defined CBA is indeed the welfare-maximizing decision procedure for agencies to
employ. But it is important to see that the welfarist defense of CBA is not limited to the argument
just sketched. CBA need not be defined in the traditional way, as the sum of CVs. The valuation
concept at the core of CBA can be amended. As we noted earlier, CVs might be replaced with
welfare equivalents, or WEs, where P’s WE is the amount of money paid to or by him in the
project world such that – on the right theory of well-being – P is just as well off there as in the
status quo. Note that CBA, defined as the sum of WEs, automatically corrects for the disjunction
between the actual-preference view and the right theory, whatever that theory happens to be. For
example, imagine that the view is a hybrid view, such that P benefits from the project if and only if
(1) he actually prefers it, and (2) he would prefer it under full information. In the case where
ignorant P prefers the project but fully-informed P would prefer the status quo, P’s CV is a
positive number but – on the theory at hand – the welfare impact of the project upon him is nil.
And so P’s WE is also nil, because that concept (by contrast with the simpler concept of the CV)
makes reference to the full and correct welfare theory.
To be sure, the accuracy of the WE in tracking the right welfare theory is, from another
point of view, a defect. CVs are relatively easy to calculate; WEs may not be. Telling agencies to
aggregate WEs rather than CVs may give them additional scope for shirking and error. But we are
confident that, at least in some cases, CBA defined as the sum-of-WEs (or something like that) will
be welfare-maximizing, as compared to traditional CBA and other procedures. CBA can, to some
extent, be modified in a way that corrects for the failings of an actual-preference view of welfare
and that still leaves in place a practicable choice procedure. At a minimum – since the traditional
version of CBA cannot just be assumed to be the welfare-maximizing version – economists,
lawyers, and philosophers need to begin considering what a sum-of-WEs approach would involve.
That is the task to which we turn in the remainder of this Article.
One final and significant point bears mention, here. We have criticized an actual-preference
theory of welfare for making P’s preferences the sole constituents of his welfare. The right theory
adds additional elements – restrictions, information, objective goods, to name some plausible
candidates – beyond sheer preference. But preference cannot be dispensed with entirely. The
9 Implementing Cost-Benefit Analysis When Preferences Are Distorted
right theory of well-being, in our view, is one that gives preference
12
a partial and constitutive role;
theories that fail to do so, so-called “objective” or “hedonic” theories, are therefore mistaken. If P
prefers the status quo to the project, and would do so (and continue to do so) even if the project
were implemented, then P is not benefited by the project. The fact that P hypothetically would
approve the project under full information, or that it is objectively good, may be necessary
conditions for the project’s benefiting P; but they are not sufficient conditions. To think otherwise
is to give too little weight to P’s own point of view; it is to think, implausibly, that P can made
better off by an option in the teeth of P’s actual and continuing aversion to it. This will be of much
importance in thinking about how agencies should modify CBA.
13
II. How Government Agencies Correct for Distorted Preferences
A preference distortion arises when a person’s CV for a project does not accurately
measure the extent to which the project improves his welfare, properly understood. The previous
Part argued that preference distortions may have diverse causes. A person’s CV for a project is
inaccurate if it reflects his disinterested preferences rather than his self-interested preferences.
Further, a person’s CV for a project may be inaccurate if his preferences are uninformed, adaptive,
or objectively bad. Finally, a person’s CV for a project is inaccurate if it is inflated by his relative
wealth or deflated by his relative poverty.
The preference distortions identified in the prior Part may seem more theoretical than real.
However, in this Part we argue that government agencies act in ways that reflect concerns about
preference distortions, and they therefore deviate from what we call “textbook CBA”
14
(by which
we mean, again, the sum of unweighted CVs based on actual, unrestricted preferences).
In Part III below, we will evaluate these administrative actions and propose modifications of the
ways in which agencies deal with preference distortions. We should stress at the outset that we do
not approve of all, or even many, of the government’s approaches to these problems; we spend
time on them in order to show that these problems are real, and pose important practical
difficulties.
A. Disinterested Preferences: The Problem of Existence Value
Textbook CBA reduces moral commitments to valuations. Consider, for example, the
12
More precisely, the right theory of well-being is one that gives preference or some other pro-attitude a
partial and constitutive role. Thus in our earlier paper, see Adler and Posner, supra note __, at ___, we characterize
ourselves as adopting a restricted desire-based view, where desires are, generically, pro-attitudes, including,
specifically, preferences. This is a point of detail that need not be pursued here.
13
More precisely, P can only be intrinsically benefited by a project if he prefers it or comes to prefer it.
Clearly, P can be instrumentally benefited absent a conforming preference, for example, in the case where P prefers a
pill which he believes to be a health-causing vitamin, when in fact it is a death-causing poison. The “project” of
keeping the pill from P benefits him notwithstanding his unchanging belief that the pill is a vitamin. See Adler and
Posner, supra note __, at __ note __.
14
We acknowledge that CBA textbook authors sometimes discuss these distortions. By “textbook CBA,”
we mean the kind of CBA which is generally espoused by its advocates, i.e., the sum of unweighted CVs based upon
actual preferences. Citations to the economic literature on CBA, and in particular to the literature advocating CBA,
are provided by Adler and Posner, supra note __, at ____.
Chicago Working Paper in Law and Economics 10
recent debate over the use of contingent valuation methods to value environmental goods.
Textbook CBA, as generally understood, directs agencies to translate people’s moral attitudes
about the environment into CVs for the “existence” of environmental goods that they do not
directly enjoy, usually called “existence value” or “non-use value.”
15
These CVs are then added to
the balance of costs and benefits of a project, like any other CV.
Until recently, agencies did not calculate existence values and use them in order to evaluate
regulations. The earliest sustained discussion of existence values by an agency that we have found
occurred in 1986, and involved the Department of Interior’s guidelines on valuing environmental
damage caused by a discharge of oil or a hazardous substance. But the rule itself did not involve
the calculation of an existence value.
16
The first use of existence values in rulemaking was, as far
as we have found, by EPA in 1991,
17
and the practice of measuring existence values has only
recently become common. For example, EPA’s recent CBA for effluent regulations included
existence valuations for “benefits to wildlife, threatened or endangered species, and biodiversity
benefits.”
18
Thus, the use of existence values by government agencies has lagged the widespread
use of cost-benefit analysis by about a decade.
One reason for hesitation about calculating existence values was no doubt methodological.
Existence values cannot be inferred from market behavior, but must be derived from costly and
controversial surveys. Another reason for hesitation might have been politics. But it is also likely
that agencies have been uncertain about the conceptual soundness of using existence values. If
not, they should have been – as we argue in the next Section.
Whether or not we are correct about the reasons for the delay in using existence values in
environmental regulation – namely, that existence values do not constitute morally relevant
information, either with respect to overall well-being, or with respect to other moral criteria – we
think these reasons do explain why existence values are not used outside environmental regulation.
FDA does not ask Christian Scientists whether they care about the existence of people using
commercial drugs. USDA does not ask animal rights activists whether they care about the
existence of slaughter houses. The U.S. Postal Service does not ask individuals whether they care
about the existence of pornography in the mail. One might be able to point to some factors that
15
Existence value is the value from knowing that some good exists; it is sometimes used interchangeably
with non-use value, but non-use value also is understood to include the option value of having some good in the
future, which we exclude from our analysis.
16
See Department of the Interior, Natural Resource Damage Assessments, 51 Fed Reg. 27,674 (August 1,
1986).
17
See Environmental Protection Agency, Approval and Promulgation of Implementation Plans: Revision
of the Visibility FIP for Arizona, 56 Fed. Reg. 5,173 (February 8, 1991).
18
Environmental Protection Agency, Effluent Limitations Guidelines, Pretreatment Standards, and New
Source Performance Standards for the Transportation Equipment Cleaning Point Source Category, 63 Fed. Reg.
34,686, 34,724 (June 25, 1998). See also Environmental Protection Agency, Lead Fishing Sinkers: Response to
Citizens’ Petition and Proposed Ban, 59 Fed. Reg. 11,122, 11,135 (March 9, 1994) (endorsing use of existence
values). The use of the methodology has been approved by the D.C. Circuit, see Ohio v. United States Department
of the Interior, 880 F.2d 432, 474-81 (D.C. Cir. 1989).
11 Implementing Cost-Benefit Analysis When Preferences Are Distorted
distinguish these cases from environmental regulation. The Constitution bars the government from
implementing religious views. Concerns about the treatment of farm animals are not as widespread
or deep as concerns about the environment. But there is no conceptual reason for distinguishing
among these different contexts. If people’s disinterested preferences are worthy of consideration
in CBAs, then disinterested environmental preferences are not the only ones that matter. All such
attitudes – including attitudes toward abortion, the death penalty, medical research, family
structure, the treatment of children, and the appropriateness of government intervention – should
be quantified, monetized, and weighed against opposing costs and benefits when agencies
implement projects.
B. Uninformed Preferences
Textbook CBA either ignores the problem of uninformed preferences (by assuming that all
persons have perfect information), or it recognizes the problem but purports to solve it by
conceptualizing information as yet another good. Individuals know that they lack information, and
are willing to pay for more information if and only if the expected gain exceeds the cost. So an
individual who is partly uninformed about a given project is rationally uninformed, and his CV for
the project should be calculated based upon his uninformed preferences.
19
Government agencies’ treatment of uninformed preferences is, in fact, more complex. At
the outset, it is worth distinguishing between the effect of information on (i) instrumental
preferences, and on (ii) intrinsic preferences. In the first case, information has the effect of
changing persons’ judgments about the causal link between the project and those states of affairs
that they intrinsically value or disvalue. P opposes a project to fluoridate drinking water because
he falsely believes that fluoridation causes cancer and does not help teeth. In the second case,
information changes intrinsic valuations. P’s CV for an arts project is low because he has not been
fully informed about the aesthetic qualities of the project.
Agencies frequently refuse to use CVs that reflect uninformed preferences. Sometimes,
agencies supply people with information when asking them for their CVs. Before asking them
about air quality over the Grand Canyon, EPA showed survey respondents photographs of the site
with different levels of pollution.
20
EPA’s goal was presumably to provide information on
environmental aesthetics, about which respondent’s intrinsic preferences were uninformed. For a
regulation involving labeling of meat and poultry products, USDA relied on CVs for health
benefits people would enjoy if they altered their behavior in response to the labels, rather than
people’s CVs for nutrition disclosure.
21
The agency appeared to take the intrinsic preference (for
health) as a given, and to circumvent the problem of imperfectly-informed instrumental preference
19
In particular, the individual’s CV would be set equal to the expected value of the project, or to the single
ex post payment in all the project states of the world such that (given the individual’s information) he is indifferent
between the project and the status quo. Lewis Kornhauser’s contribution to this symposium provides a more detailed
discussion of how textbook CBA calculates CVs when actors are not fully informed. See Lewis A. Kornhauser, On
Justifying Cost-Benefit Analysis, __ J. Legal Stud. ___ (2000).
20
See Leland Deck, Visibility at the Grand Canyon and the Navajo Generating Station, in Economic
Analysis at EPA 267 (Richard D. Morgenstern ed. 1997).
21
Department of Agriculture, Nutrition Labeling of Meat and Poultry Products, 56 Fed. Reg. 60302
(November 27, 1991).
Chicago Working Paper in Law and Economics 12
(for nutritional disclosure). Instrumental preferences are constructed; people are assumed to have
preferences for whatever means will best satisfy their intrinsic preferences, even if they are
misinformed about these means — even if, in our example, some people would oppose labeling
because they (falsely) think it will confuse them.
The premise of modern workplace regulation is that workers are uninformed about risks.
If this premise is false, then wages and workplace safety procedures reflect rational tradeoffs made
by workers, and regulations simply interfere with the satisfaction of their preferences. It would
make no sense, for example, for OSHA to restrict workers’ exposure to ethylene dibromide, a
carcinogenic chemical used in various industries,
22
because any restrictions sufficiently cheap that
workers are willing to pay for them have voluntarily been implemented by employers. More risk-
averse workers would move to safer, lower-paying jobs; more risk-preferring workers would take
the more dangerous, higher-paying jobs. In such a labor market, regulations would be costlier
than their safety benefits warrant. The denial that this market prevails is implicit in all regulation of
contractual relations; agencies occasionally are explicit about it.
23
In sum, agencies do not always take uninformed preferences as they find them. Instead,
they often evaluate projects by using the preferences people would have if they were informed.
C. Adaptive Preferences
Textbook CBA does not recognize the existence of adaptive preferences. Preferences that
are the result of adaptation are treated the same as preferences that are not the result of adaptation.
As noted in Part I, people may psychologically adapt to an unjust or otherwise unfavorable
environment, so that their CV for eliminating a risk or irritant is less than what it would be if they
did not adapt. Sen argues similarly that an overburdened housewife might rationalize her position,
and so not be willing to pay in order to have her burdens removed.
24
Or a person in a bad
environment might feel sour grapes toward someone in a pleasant environment, and refuse to pay
for an improvement in his own environment because he has convinced himself that the pleasant
environment is really worse. Or a person might adapt to the status quo, so while he will oppose
any project, if the project were nevertheless implemented, he would oppose a further project that
would reverse the first.
25
Many agency programs assume that people’s preferences are distorted by psychological
problems. For example, programs to reduce drug use assume that drug addicts would be benefited
22
See Department of Labor, Occupational Exposure to Ethylene Dibromide, 48 Fed. Reg. 49,959 (October
7, 1983).
23
See, for example, Department of Labor, Occupational Exposure to Bloodborne Pathogens, 56 Fed. Reg.
64,004, 64,087 (December 6, 1991) (arguing that workers do not know about many risks, and are unable to analyze
them correctly).
24
Sen, supra note __.
25
Cass R. Sunstein, Free Markets and Social Justice 252-53, 256-58 (1997); Jon Elster, Sour Grapes:
Studies in the Subversion of Rationality (Cambridge 1983).
13 Implementing Cost-Benefit Analysis When Preferences Are Distorted
by restrictions on drugs, not harmed by them, even though their preferences may well be the
opposite. In justifying regulations governing anti-drug programs for the employees of private air
carriers, the Department of Transportation did not take into account the preferences of the drug
users, even though these people may well be hurt by the regulations on an actual-preference
account of CBA.
26
In justifying mandatory drug tests for drivers of commercial vehicles, DOT did
not take account of the cost to drivers who derive pleasure from the use of alcohol and illegal
drugs.
27
Yet in these same regulations, the agencies did take account of preferences that are not
considered adaptive, such as preferences for time or money.
However, several qualifications are necessary. First, agencies do not generally assume that
preferences are defective in these ways unless directed by a statute. Second, it is not clear whether
the preferences of drug users are ignored because they are adaptive or because they are considered
objectively bad (see below) or distorted in other ways.
28
D. Objectively Bad Preferences
Textbook CBA assumes that objectively bad preferences should receive the same weight as
morally neutral preferences. An agency should presumably count the preferences of a person who
hates children, and is willing to pay $1000 to prevent a children’s vaccine program, or the
preferences of a person who hates homosexuals, and is willing to pay $1000 to prevent AIDS
research.
Agencies routinely ignore sadistic preferences and other objectively bad preferences. For
example, the FDA’s cost-benefit analysis of a regulation designed to curb distribution of cigarettes
to children, did not include as a cost the lost profits to industry, “because most of this profit stems
from illegal sales to youths.”
29
Nor did it count the children’s lost consumer surplus. It is hard to
believe that agencies would count a preference that homosexuals not be helped through AIDS
research, no matter how widespread that preference may be. And, as we saw above, DOT’s
refusal to count the preferences of drug users may reflect an evaluative judgment (on the part of
26
Department of Transportation, Anti-Drug Program for Personnel Engaged in Specified Aviation
Activities, 53 Fed. Reg. 26,794 (November 21, 1988).
27
See Department of Transportation, Federal Motor Carrier Regulations; Controlled Substances and
Alcohol Use and Testing; Commercial Driver’s License Standards, Requirements and Penalties; Hours of Service of
Drivers, 57 Fed. Reg. 59,567 (December 15, 1992).
28
Rather than being adaptive or objectively bad, it might be the case that a drug user’s preference is (1)
uninformed, in the sense that she is mistaken about the consequences of drug use (health consequences, the risk of
addiction); (2) akratic, in the sense that the drug user prefers not to use drugs, given its consequences (of which she is
aware), but nonetheless irrationally continues to use them; (3) conflicted, in the sense that she has a first-order
preference for drug use but a second-order preference not to have this first-order preference; or (4) coerced, in the sense
that the drug addict has a preference for drug use only because she will experience miserable “withdrawal symptoms”
if she stops using drugs. Cf. Douglas Husak, Drugs and Rights (1992) (considering, but rejecting, possible grounds
for regulating recreational drug use).
29
Food and Drug Administration, Regulations Restricting the Sale and Distribution of Cigarettes and
Smokeless Tobacco to Protect Children and Adolescents, 61 Fed. Reg. 44396, 44593 (August 28, 1996).
Chicago Working Paper in Law and Economics 14
Congress) rather than, or in addition to, a concern that the preferences are adaptive.
As another example, consider an FAA program for airline security, which refused to use
profiling on the basis of race, national or ethnic origin, and other possibly relevant but morally
suspect factors. Although FAA performed a CBA, it did not consider the possibility that a
discriminatory system might be less costly than the system that it endorsed,
30
or that some people
(white supremacists, racially biased airline travelers) might have strong tastes for discrimination
and therefore have significant, positive CVs for a discriminatory system.
In sum, agencies depart from textbook CBA by refusing to weigh certain kinds of
objectively bad preferences. This practice is not as obvious as other adjustments are, because we
are not accustomed to thinking that satisfying preferences for discrimination, suffering, and other
morally bad outcomes will benefit the holders of the preferences. Thus the agencies’ practice
seems natural. But that is only because in this significant respect textbook CBA deviates from
common moral intuitions.
E. Wealth Distortions
Textbook CBA does not adjust for distortions caused by the distribution of wealth. A
wealthy person is willing to pay more to reduce the risk of death than is a poor person with
identical preferences, but it does not follow that the agency maximizes welfare by placing
dangerous projects in poor neighborhoods rather than in rich neighborhoods. On the contrary, it
seems reasonable to assume that premature death has the same effect upon overall well-being,
whether the person who dies prematurely is wealthy or poor. Note that this distortion is different
from the other three. The others arise because of the disjunction between preference-satisfaction
and well-being; relatedly, they cause (or may cause) a deviation between CVs and WEs. By
contrast, the wealth distortion described just now arises because CVs and WEs are calculated in
terms of dollars, which do not accurately reflect relative well-being when endowments differ. This
distortion would exist even if actual and undistorted preferences did not diverge, and (where they
do diverge) even if agencies were able to costlessly and accurately calculate WEs.
Agencies correct for wealth distortions in various ways. They use a constant figure for the
monetized value of life.
31
They rely on quality adjusted or non-adjusted life years, which is a
number that is invariant with wealth.
32
HHS, for example, said that the benefit of its organ
30
Department of Transportation, Security of Checked Baggage on Flights Within the United States, 64
Fed. Reg. 19,220 (April 19, 1999).
31
See United States General Accounting Office, Regulatory Reform: Agencies Could Improve
Development, Documentation, and Clarity of Regulatory Analysis 26-27 (GAO/RCED-98-142, 1998). More
precisely, they use a range, but they do not make their choice within the range depend on the wealth of the victims.
32
See Department of Health and Human Services, Regulatory Impact Analysis of the Proposed Rules to
Amend the Food Labeling Regulations, 56 Fed. Reg. 60856, 60871 (November 27, 1991) (“dying of a heart attack
at age 80 is posited to be of less societal concern than dying in a car accident at age 35.”) Yet the 80-year old might
have a higher CV than the 35-year old.
15 Implementing Cost-Benefit Analysis When Preferences Are Distorted
transplant rule was the saving of 297 to 1306 life-years.
33
They quantify other benefits without
monetizing them. EPA, for example, noted that a regulation of certain heavy-duty engines would
reduce nitrogen oxide emissions by 593,000 tons, without attaching a value to this amount.
34
In
all these cases, the “costs” of the regulation are invariant to the wealth of those affected by them.
Of course, as they depart farther and farther from the use of CVs, the basis of evaluation becomes
increasingly obscure.
Agencies also correct for wealth distortions in more broad-gauged ways. Regulation of
pesticides and lead-based paint may have been influenced by a desire to benefit, on distributional
grounds, low-income farm workers, in the first case, and low-income inner city residents, in the
second.
35
Agencies also pay attention to whether a regulation will “threaten the existence” of an
industry, that is, have substantial, concentrated impacts.
36
Indeed, Clinton-era executive orders
that require consideration of “environmental justice” and equity appear to require attention to the
distributional consequences of regulations.
37
The original executive order directing agencies to use
CBA says:
When an agency determines that a regulation is the best available method of achieving the
regulatory objective, it shall design its regulations in the most cost-effective manner to
achieve the regulatory objective. In doing so, each agency shall consider incentives for
innovation, consistency, predictability, the costs of enforcement and compliance (to the
government, regulated entities, and the public), flexibility, distributive impacts, and
equity.
38
33
Office of Management and Budget, Draft Report to Congress on the Costs and Benefits of Federal
Regulations, 63 Fed. Reg. 44,034, 44,048 (August 17, 1998). See also id., at 44,052-053, on FDA and other
agencies.
34
Id., at 44,048.
35
Louis P. True, Jr., Agricultural Pesticides and Worker Protection, in Economic Analysis at EPA 324
(Richard D. Morgenstern ed. 1997); Environmental Protection Agency, Lead: Identification of Dangerous Levels of
Lead, 63 Fed. Reg. 30302, 30305 (June 3, 1998); Department of Housing and Urban Development, Office of Lead-
Based Paint Abatement and Poisoning Prevention; Requirements for Notification, Evaluation and Reduction of Lead-
Based Paint Hazards in Federally Owned Residential Property and Housing Receiving Federal Assistance, 61 Fed.
Reg. 29170, 29202 (June 7, 1996).
36
See, for example, Department of Labor, Occupational Exposure to Bloodborne Pathogens, supra note
__, at 64,082.
37
See Executive Order No. 12,898, 59 Fed. Reg. 7629 (February 16, 1994) (environmental justice).
38
Executive Order No. 12,866, 58 Fed. Reg. 51735 (Sept. 30, 1993) (emphasis added). Guidelines issued
by OMB say, “When benefits and costs have significant distributive effects, these effects should be analyzed and
discussed, along with the analysis of net present value.” Office of Management and Budget, Guidelines and Discount
Rates for Benefit-Cost Analysis of Federal Programs, Circ. No. A-94, Rev. (October 29, 1992), available from
Westlaw in the database, “OMB-circular.”
Chicago Working Paper in Law and Economics 16
One might doubt whether these instructions have had much impact. On the one hand, agencies
typically publish, alongside the CBA, a discussion of distributive impacts. On the other hand,
these discussions are usually formulaic and inconclusive. But they do show that distributive issues
have some prominence, contrary to the prescription of textbook CBA.
39
F. Some Objections
Agency practice diverges in many ways from the requirements of textbook CBA. We
argue that these practices reflect, in a loose and mostly unarticulated way, our concerns about the
moral foundations of CBA.
An alternative hypothesis is that the divergence between agency practices and textbook
models reflects either attempts to economize on decision costs or political constraints.
Neither of these alternatives is plausible. Agencies economize on decision costs in many
ways, but what needs to be explained is a more complex pattern of behavior. Often agencies do
expend considerable resources to determine what people’s CVs are, and often they do not; the
question is, why do they expend resources sometimes and not at other times? Consider agencies’
refusals to determine the CVs of drug users when a project increases the cost of using drugs; or
their refusals to determine the CVs of racists for a project that involves racial profiling. Calculating
these CVs is no more costly than calculating CVs in other contexts – for example, the CV of
someone who is harmed by airplane noise or the CV of someone who experiences an increased
risk of cancer. When agencies face high decision costs, they are usually quite candid about this
problem. They will say that data are unavailable or too costly to acquire. They will make estimates
based on a small sample. It is impossible to imagine an agency saying that the only reason that it
did not calculate the CVs for drug use or racial discrimination is that data were unavailable.
The political argument might be that interest group politics result in the divergences that we
have discussed. But there are interest groups on both sides of virtually every regulation. A more
plausible political account of agency practice is that agencies fear public outrage. Agencies hesitate
about using wealth-dependent valuations of life, or respecting preferences for drug use, or
attaching dollar values to environmental amenities, because these practices may produce public
outrage. Public outrage may reflect ignorance, or herding, or strategic behavior,
40
but we think
that it also reflects a conviction that deep moral intuitions are being ignored. If this is the case, the
political argument is no different from our moral argument.
Defenders of textbook CBA will more likely regret the divergence between textbook CBA
and agency use of CBA, than explain it away. But we think that the divergence justifies attention
to the problems with textbook CBA, and provides support for our view that unrestricted
preferences should not always be the basis of agency action. Nonetheless, the agency practices we
have discussed raise questions.
First, as we have already pointed out, it is improper for agencies to correct for the fact that
actual preferences may be distorted by shifting wholesale to undistorted preferences, and
39
Ironically, the one thing that agencies do not do is use explicit weightings of CVs on the basis of
marginal utilities of money, which is the most popular approach in CBA textbooks.
40
See Eric A. Posner, The Strategic Basis of Principled Behavior: A Critique of the Incommensurability
Thesis, 146 U. Pa. L. Rev. 1185 (1998).
17 Implementing Cost-Benefit Analysis When Preferences Are Distorted
calculating CVs based on those. What kind of shift should be made is a subtle problem, and will
vary depending on the source of distortion. Second, the modifications risk making CBA less
transparent, cheap, and reliable. When agencies are told that the preferences relevant for CBA are
different from the preferences people actually hold, they obtain a degree of freedom that will
interfere with review by hierarchical superiors. Finally, there is no generally accepted means for
correcting for wealth distortions. The balance of the Article examines these problems in detail.
III. How Agencies Should Respond to Distorted Preferences
A. Disinterested Preferences
Many people criticize agencies’ use of contingent valuation techniques to measure existence
values, but these criticisms are for the most part methodological. Critics argue that contingent
valuation techniques do not yield reliable results. Defenders argue that the techniques are adequate
or improving. They argue that if surveys were conducted more carefully, or with certain controls,
then inconsistencies and intransitivities would disappear.
41
However, as several economists have
acknowledged, the main problem with contingent valuation of environmental goods is conceptual,
not methodological.
42
When people are asked for existence values, they often respond in strange ways. They
refuse to answer surveys on environmental goods or, by way of protest, register zero valuation or
unrealistically high valuations that agencies must ignore. They provide valuations that are invariant
across large and small parcels of wilderness or quantities of wildlife, or that are inconsistent or
intransitive. Their answers depend on the order in which questions are asked, and are sensitive to
the wording of the questions.
43
Although one might hope for improvements that will eliminate inconsistencies, it is clear
that no amount of methodological refinement will eliminate protest responses in the form of
unrealistically high or low valuations or refusals to answer. But these responses must reflect
something. When people give valuations of zero or infinity, these responses should be interpreted
as an assertion that the question does not make sense, not as an assertion that the respondent would
give nothing to save the environmental good (in the first case), or everything (in the second case),
or is acting strategically (in either case) since he must know that his response will be disregarded.
This is even more clearly true when people refuse to respond to the surveys.
What about “reasonable” CVs for environmental goods when people do not directly enjoy
them? When people have no direct experience of environmental goods, and claim to be willing to
41
See the essays in Valuing Environmental Preferences: Theory and Practice of Contingent Valuation in
the US, EU, and Developing Countries (Ian J. Bateman & Kenneth G. Willis eds. 1999); Using Surveys to Value
Public Goods: The Contingent Valuation Method (Robert Cameron Mitchell & Richard T. Carson eds. 1989).
42
See, for example, Charles R. Plott, Contingent Valuation: A View of the Conference and Associated
Research, in Contingent Valuation (Hausman ed.), supra note __, at 470-73; Donald H. Rosenthal and Robert H.
Nelson, Why Existence Values Should Not Be Used in Cost-Benefit Analysis, 11 J. Policy Analysis & Management
116 (1992). But compare Gardner M. Brown, Jr., Economics of Natural Resource Damage Assessment: A Critique,
in Valuing Natural Assets (Raymond J. Kopp & V. Kerry Smith eds. 1993).
43
See Plott, supra note __, at 471-73, for a brief summary of the literature.
Chicago Working Paper in Law and Economics 18
pay just for their existence, then (aside from the option value for possible use) this CV cannot
reflect the goods’ contribution to well-being. The dollar amounts in the survey responses should
be interpreted as a valuation of the violation of a moral commitment, not as a valuation of an
environmental amenity. To the extent the dollar amounts thus reflect moral commitments,
aggregating them does not give one information about the effect of the project upon overall well-
being or upon other moral criteria.
Why shouldn’t agencies pay attention to valuations people attach to violations of moral
commitments? To see why, suppose that P believes that he will gain $100 from the construction of
a dam as a result of lower electricity bills, but believes that construction of a dam is immoral. Q
would lose $125 as a result of higher fish prices, but believes that construction of a dam is a moral
obligation (“the march of progress”). P would pay an additional $50 to see his moral commitment
vindicated, and Q would pay an additional $100 to see her moral commitment vindicated. These
additional payments are, we suggest, morally irrelevant; they neither change the effect of the
project on overall well-being (which is negative), nor do they change the moral status of the project
in some other regard. The project is either moral or immoral or morally controversial; its morality
does not depend on how much people are willing to pay to vindicate their moral views. If P
receives a large inheritance, and so is willing to pay another $200 to see the project stopped, and
this increase reflects his moral values, then it is false to say that the moral status of the project
switches back from positive to negative, just because P’s inheritance now enables him to outbid Q.
Now it might be the case that an agency should take account of people’s disinterested moral views
when it decides whether to implement a project. We discuss this possibility below. The point to
understand is that even if an agency should, it should not try to monetize these disinterested
preferences, and should not include them as part of a CBA.
How then should environmental commitments (as well as other disinterested preferences)
be recognized? There are two possibilities. The first is that agencies should have the minimal task
of determining the effect of projects on overall well-being, and different political actors –
Congress, the courts – should enforce moral commitments. No one asks agencies to decide
whether to implement such “projects” as abortion legalization and capital punishment. In the
political arena controversial issues are not resolved by cost-benefit analysis, but instead by political
and moral debate through which people find common ground. Congress and the courts can erect
constraints that bind agencies. These constraints prevent agencies from approving projects that,
among other things, involve racial discrimination, the use of fetal tissue, and experimentation on
people who do not give their consent – regardless of the extent to which the benefits of these
projects outweigh their costs.
44
The second possibility is to allow agencies to take into account the full range of moral
considerations bearing upon projects, and not simply the criterion of overall well-being. We have
no objection to this alternative, in theory, as long as it is understood that the agency should not
resolve a question of fairness, or deontological rights, or distributive justice – say, the use of fetal
tissue in medical research – by engaging in cost-benefit analysis. The use of fetal tissue might be
morally correct, or wrong, or morally controversial, but the resolution does not depend on whether
one side of the debate is willing to pay more than the other side of the debate, in order to see its
views embodied in the law. In any event, we suspect that agencies should not be given this
authority, because they are not generally well-positioned to make moral decisions other than
decisions regarding welfare-maximization.
44
See Department of Transportation, Security of Checked Baggage, supra note __.
19 Implementing Cost-Benefit Analysis When Preferences Are Distorted
Finally, it bears emphasis that the case of morally-motivated preferences is arguably just the
most extreme example of disinterested (non-welfare-relevant) preferences. Consider the case
where P prefers the project not because it matters to his own well-being, but also not because he
takes it to be morally obligatory; rather, P’s preference is motivated by some kind of group loyalty.
Or consider the case where P prefers the project out of a sense of obligation to his children. If we
had a full and persuasive theory of how preferences should be “restricted” – of how the distinction
between disinterested and welfare-relevant preferences should be drawn – then we might suggest
that agencies should ignore any kind of disinterested preference or preference-motivating
consideration in calculating WEs . But no such theory is yet at hand. The case of morally-
motivated preferences is, for now, the only case in which it is (1) clear that CVs can be
disinterested and therefore diverge from WEs; and (2) practicable to enjoin agencies that they
should adjust CVs so as to eliminate the effect of disinterested preferences.
45
B. Lack of Information
Suppose that an agency is considering whether to construct a park. A person P has no
knowledge about the advantages of parks, so his CV may diverge from his WE. Specifically, let
us imagine that P’s CV is -$10: when asked how much he would pay or require to be paid in the
project (park) world so as to be indifferent between the park and the status quo, he answers that he
would require to be paid ten dollars. The reader unfamiliar with the technicalities of cost-benefit
analysis may ask: Why does P’s response here translate into a CV of -$10, not $10? The answer is
that, if a person prefers the status quo to the project and thus requires to be paid some amount in
exchange for the project, this produces a negative CV; while if a person prefers the project to the
status quo and thus is willing to pay some amount in exchange for the project, this produces a
positive CV.
Further, let us define P’s CV-I as his hypothetical willingness to pay, given complete
information: the amount that, if P were fully informed, he would pay or require to be paid in the
project (park)
46
world so as to be indifferent between the park and the status quo. Assume that
CV-I is $100. (Note that CV-I, not CV, is the number that an agency elicits when respondents to
valuation surveys are provided with detailed information about projects, such as in the Grand
Canyon study). Which number should the agency use in its CBA of the park? In particular, what
is P’s WE? Is it -$10, $100, or something else?
The answer depends on the nature of the project. Let us distinguish several possibilities.
First, people might costlessly and rapidly acquire the relevant information when the project
is completed. P’s CV is low (-$10) because he thinks that park views are ugly; in fact, they fill
45
Cf. David Sobel, Well-Being as the Object of Moral Consideration, 14 Econ. & Phil. 249 (1998),
which provides a critical overview of philosophical attempts to distinguish between disinterested and welfare-relevant
preferences.
46
For the remainder of this Article, unless otherwise noted, it should be assumed that all payments to or
from persons are made in the project world. This is a basic feature of the CV. That construct –by contrast with the
so-called “EV” or equivalent variation – is defined in terms of the amount that persons would pay or require to be
paid in the project world, not the status quo world. Similarly, all the variations on the concept of CV that we shall
develop here, such as the WE, or the CV-I, shall be based on project-world payments. Each of these variations can
be matched with an analogous variation on the concept of the EV; but since cost-benefit analysts in practice use
CVs, not EVs, our focus will be upon the CV and its refinements.
Chicago Working Paper in Law and Economics 20
him with joy. His belief is wrong because he has never seen a well-maintained park. If P held the
correct belief, he would be willing to pay $100, his CV-I; and if the park is implemented, his actual
valuation will change to $100. Under these conditions WE is equal to CV-I rather than CV, and
P’s valuation should be treated as though it were $100.
47
Second, people might never acquire the relevant information. P might undervalue the park,
because he thinks it is full of common and easily-cultivated plants, when in fact they are rare and
difficult to grow – something P never learns. So P’s actual valuation of the park remains -$10,
even after the park is implemented. This is one type of case where correcting for preference-
distortion by looking to undistorted preferences (CV-I) turns out to be a mistake. Although CV-I is
$100, P’s WE cannot be greater than $0. As we have elsewhere argued in greater detail, it is a
necessary condition for a person to benefit from a project that (at some point) she prefer that project
to the status quo; actual preferences have at least that role on the correct theory of well-being,
however idealized. This premise, a quite basic one, has the immediate implication that P cannot
benefit from the project just described – in other words, that his WE must be $0 or negative.
A harder question is whether P’s WE should be equated here with his CV (-$10), or set at
0, or given yet another (negative) value. That question cannot be answered without a particular
view as to how uninformed and fully-informed preferences interact to produce well-being. On one
view, WE is properly -$10 because it is P’s uninformed preferences that constitute (and continue to
constitute) P’s view of the world. On another view, both types of preferences have a coequal role
in shaping welfare; P cannot be made better off by a project that he never comes to actually prefer,
but neither can he be harmed by a project that, if fully informed, he would prefer. Thus he neither
truly gains, nor truly loses, and his WE is neither his CV nor his CV-I but 0. We confess to being
swayed by the view that equates WE and CV (in the case at hand), but it is beyond the scope of
this paper to take a definitive stand on that.
Several variations on this second case should be mentioned. One is where CV and CV-I
have the same sign, but differ in amount. P barely likes the park, and would like it more if he
knew about it; or he detests it, and would slightly dislike it if better informed. Note that the
premise we invoked above – actual preference is a necessary condition for benefit – does not here
help in deciding where WE lies in the range between CV and CV-I. A different variation on the
second case is where information changes P’s behavior. For example, a well-informed P would
go into the park (and CV-I is based on the prediction that he would thus behave), but in fact P
never learns something significant about the park and never goes in. In this particular example, P
is not made better off by the park because he does not use it; his WE is not greater than $0, even
though CV-I is $100. Generalizing from the example is hazardous, but it at least seems clear that
WE can differ from CV-I by virtue of the behavioral impact of imperfect information.
47
As we explained in Part I, we do not have a general theory as to how fully-informed preferences and
uninformed preferences interact, to produce well-being. But we are reasonably convinced that, in the particular case
at hand, WE is equal to CV-I rather than CV.
What if a period of time must pass during which P learns to appreciate parks? The simple solution is to
discount to present value the amount he would pay once informed. P’s CV should not be treated as though it were
$100, but as though it were $100 discounted to present value. However, this simple solution is merely a suggestion
on our part; the propriety of discounting future benefits and harms is a controversial issue that we do not have space
to discuss here. See generally Richard L. Revesz, Environmental Regulation, Cost-Benefit Analysis, and the
Discounting of Human Lives, 99 Colum. L. Rev. 941 (1999).
21 Implementing Cost-Benefit Analysis When Preferences Are Distorted
Finally, the second case can be varied by having the information change instrumental
judgments rather than intrinsic valuations. The project is not a park, but an air-quality project,
which P values (and would value under full information) in light of the effect of air quality on his
longevity. He believes, incorrectly, that the cleanser used by the project would actually reduce his
longevity, so CV = -$10. In fact, the cleanser improves air quality, so CV-I = $100. Here, the
case for setting WE equal to CV-I even if P remains uninformed about the project once
implemented seems stronger.
To turn now to a third case: people might acquire the relevant information only if the
agency feeds it to them. The agency might have to distribute leaflets describing the benefits of
parks, or invest in television commercials. These activities are costly, and should be included in
the cost of the project. If the cost of disseminating information is high enough that the project has
negative value once that cost is taken into account, then we have the second case, above.
Otherwise, the agency performs an educative function as well as implementing the project.
B. Objectively Bad Preferences
Suppose some people support or oppose projects because their actual as well as fully-
informed preferences are sadistic. A person might favor a park because he wants to see a
neighbor’s beloved home demolished in order to make way for the park, or oppose the park
because he does not want his neighbors to benefit from higher property values. Or a person might
oppose AIDS research because he dislikes homosexuals and drug users with whom he is
acquainted, and does not want to see their suffering relieved. Or, suppose some person prefers a
way of life that is clearly worthless. Person P wants to spend his days in an opium-induced haze,
rather than working, developing relationships, accomplishing intellectual or practical goals, starting
a family, or doing anything else; and this preference is whole-hearted, in the sense that it conflicts
with no second-order preference of P’s
48
and does not change under full-information.
The sadism and drug-fixation
49
examples show that objective criteria are sometimes
plausibly relevant to agency decisions and CBA.
50
The simplistic account of their relevance runs
as follows: If the status quo is bad for person P in light of objective criteria, and the project is
better for P in light of objective criteria, then the move from the status quo to the project improves
P’s welfare, regardless of P’s actual preferences. But this simplistic account is incorrect, given the
role of actual preference as a constituent (if not the sole constituent) of well-being. If the project is
objectively better for P than the status quo, but P prefers (and would continue to prefer) the status
quo, then his WE for the project cannot be larger than 0. This is precisely parallel to the point we
made in Section III.A, about the size of WE given a deviation between actual and fully-informed
48
See Harry Frankfurt, Freedom of the Will and the Concept of a Person, 68 J. Phil. 5 (1971) (discussing
second-order preferences).
49
The opium user’s case is a case of drug “fixation,” not “addiction,” since his preference for drug-use is
fully informed, whole-hearted, and (let us assume) otherwise autonomous. Government might plausibly prohibit
the fully autonomous use of drugs just because that activity is thought to be objectively worthless.
50
For arguments to the effect that objective values are a component of welfare, see, for example, John
Finnis, Natural Law and Natural Rights (1980); Martha Nussbaum, Nature, Function, and Capability: Aristotle on
Political Distribution, Oxford Studies in Ancient Philosophy 145 (supp. vol; Julia Annas and Robert Grimm, eds.,
1988); George Sher, Beyond Neutrality: Perfectionism and Politics (1997).
Chicago Working Paper in Law and Economics 22
preferences.
So how should WE be calculated where criteria of objective welfare-value, and actual
preferences, diverge? In theory, we could think of the interaction between preference and value, to
produce WE, along the following lines: Define a new measure, CV-O, as the amount that P would
be willing to pay or be paid for the project if his preferences perfectly tracked considerations of
objective value; and then set WE depending upon the divergence between CV-O and CV. For
example, P is willing to pay $10 for a new art museum, but if his preferences tracked objective
values, he would be willing to pay $50; WE would be some amount between $10 and $50,
depending on how exactly actual preferences and objective values interact under the right theory of
well-being.
But this suggestion is not practicable. Calculating CV-O would be a hopelessly difficult
task for agencies that were sincerely trying to measure WEs. Further, instructing agencies to
determine CV-O would significantly increase the opacity of CBA and thus the extent to which
agencies can pursue their own agendas rather than sincerely attempting to perform CBA.
We are less sanguine about integrating considerations of objective value into agency
decisionmaking, than we are about integrating the informational considerations discussed in
Section III.A. — what P would prefer under full information, as against what he actually prefers –
given that claims of objective value are highly contestable and not amenable to empirical testing..
A simpler and more practicable approach would be for objective values to bear upon agency
valuations like this: If P is so perverse as to prefer a project that is clearly
51
objectively bad, or to
disprefer a project that is clearly objectively good, then P’s WE should be taken by the agency to
be 0. Otherwise (except in the case of changing preferences, to be considered momentarily),
objective values should be ignored.
52
A plausible supplement to this proposal is to use objective values as a tool for choosing
between different sets of actual preferences, where those preferences change over time. Suppose
that P prefers the status quo, but would prefer the project if it were implemented. Specifically,
suppose that P’s CV for the project based upon status-quo-world preferences is -$20, while his
CV for the project based upon his project-world preferences is $15.
53
In this sort of case,
51
“Clear” is an attempt to sort between value choices sufficiently uncontestable not to give rise to serious
problems of transparency, etc, and other sorts of value choices. It might not work.
52
It is plausible that objective values are one component of well-being, but - as we stated in Part I – we
are unsure whether this plausible suggestion is really correct. Thus the recommendation advanced in the text is a
contingent one: If the designer of administrative procedures takes objective values to be a component of well-being,
then he should instruct agencies to calculate WEs as recommended. The recommended use of objective values as a
tiebreaker for choosing between different sets of actual preferences, set forth immediately below, is similarly
contingent.
53
This distinction between status-quo-world and project-world preferences should not be confused with the
quite separate distinction between CVs and EVs. (As we have already explained, textbook CBA generally uses CVs,
not EVs, and the analysis in this paper is similarly focused upon CVs.) The CV/EV distinction concerns where
dollar payments occur: P’s CV is the hypothetical dollar payment in the project world that would counterbalance the
project’s effect on him, while his EV is the hypothetical dollar payment in the status quo world that would
counterbalance the project’s effect on him. If P has unchanging preferences, then his EV and CV can still differ, but
his CV will be a single, unique amount. By contrast, if P has different preferences in the project and status quo
23 Implementing Cost-Benefit Analysis When Preferences Are Distorted
textbook CBA has no resources for assigning P a unique project valuation. Both the status-quo-
world and the project-world preferences are actual-preference sets of P; given the view of welfare
traditionally associated with cost-benefit analysis, namely the unalloyed actual-preference view,
there are no grounds for picking one set or the other as the unique basis by which to measure P’s
valuation of the project. Thus the textbook approach (at least in theory) would be to calculate two
aggregate CV measures for the project described here, one assigning P a CV of -$20 and the other
assigning her a CV of $15. This could, in turn, produce an indeterminacy at the level of aggregate
CV and, thus, in the overall cost-benefit evaluation of the project. For example, if the project
described here affects no one else in the world but P and Q, and Q’s CV for the project is -$10,
then one aggregate CV measure of the project ($-20 + $-10 = -$30) counts it as worse than the
status quo; while another aggregate CV measure of the project ($15 + -$10 = $5) counts it as
better.
However, a more sophisticated account of welfare may enable us to choose between
conflicting sets of actual preferences, and thus to assign a unique WE to persons whose
preferences change over time. If P’s status-quo preferences are distorted in some way, while his
project-world preferences are undistorted, then plausibly P should be assigned a unique WE based
upon his undistorted, project-world preferences. This is, in effect, what we argued above where
the distortion at hand was P’s lack of information: where the project would increase P’s
information, such that his (uninformed) status-quo preferences and (informed) project-world
preferences are different, agencies should use the latter in calculating P’s WE. The same is
plausibly true where the distortion at hand is the deviation between P’s preference and criteria of
objective value. If the project is clearly better for P than the status quo, and if P’s project-world
preferences favor the project while his status-quo preferences do not, then the agency does have a
basis for choosing between the two sets of preferences, and it is willingness-to-pay based upon
project-world preferences that the agency should use to calculate a unique WE for P.
C. Adaptation
Suppose people are not willing to pay for parks because they have adapted to a world
without parks. Or they have persuaded themselves that only rich people need parks, because rich
people are effete and weak. Merely informing people about the benefits of parks, then, will not
cause people to change their preferences. Indeed, to keep the example as clear as possible, we will
assume that people are well-informed.
One should distinguish two kinds of adaptation. In the first case, people’s adaptive
preferences never change. Whether or not the agency creates a park, P will always oppose parks
because of his impoverished childhood. For the same reason that agencies should not implement
projects that benefit people only if they obtain information that will forever elude them, agencies
should not implement projects only because the projects are ranked higher by idealized (“non-
adaptive”) preferences
54
that will never become actual. Where P prefers and continues to prefer
the status quo (given his actual, adaptive preferences), the project cannot be welfare-improving for
him – his WE for the project cannot be greater than 0 – even if P’s idealized, “non-adaptive”
preferences point in favor of the project.
world, then this can give rise to two different values for his CV. That is our concern here.
54
Everything we say in this Section holds true regardless of the specifics of a theory for deciding when
preference are inappropriately “adaptive” and for constructing idealized, “non-adaptive” preferences.
Chicago Working Paper in Law and Economics 24
To see why, imagine that the overburdened housewife discussed by Sen
55
opposes a
project to create a well near her home, preferring the long walk to the river (which, let us assume,
the well project will make inaccessible to her). If her preferences truly cannot be expected to
change in response to the project – if she will use the well with regret, continuing to prefer the
world in which she walked to the river – then it is hard to say how the project would make her
better off. The project might be supplemented with educational efforts, in the hope that the
housewife will develop different preferences as a result of education. But in the limiting case
where the housewife’s preferences are irrevocably entrenched, by virtue of upbringing, her WE for
the project is no greater than 0.
As with the information case, the issue remains whether the housewife should be counted
as being hurt by the project or instead be given a WE of 0. If the answer is 0, then the housewife
is in effect ignored by the agency in its cost-benefit analysis of the well project even though her
actual valuation of that project is negative. If the answer is to set WE equal to CV, then the agency
would simply not take account of the fact that the housewife’s preferences are adapative. This
might be the right answer, because the third alternative – to choose a number between 0 and the CV
that properly reflects the degree of adaptiveness – is unpalatable. The problem with this alternative
is its excessive difficulty. The problem here is even more difficult than the problems posed by lack
of information. One can more easily imaginatively construct informed preferences out of
uninformed preferences, than non-adaptive preferences out of adaptive preferences. If the
housewife prefers the walk because she was abused as a child, can we imagine what her
preferences would be if she had not been abused? If she prefers the walk because she has
unconsciously absorbed the views of her neighbors, can we imagine what her preferences would
be if she has not unconsciously absorbed these views? We doubt that these questions can be
answered, and we are sure that administrative agencies are in a poor position to answer them.
One possible solution to the problem is to use criteria of objective value. This is the
solution we tentatively recommend. Sometimes, adaptive preferences will also be clearly
objectively bad. Perhaps this is true of the well case: perhaps it is clearly objectively better for the
housewife to use the well than to walk to the river. If so, our suggested rule for the case of
objective value would come into play,
56
and the housewife’s WE would be set at 0. Sometimes,
however, a person P can have an adaptive preference for the status quo – that preference can be
rooted in some injustice or other deficiency of the person’s background – even though the status
quo is not objectively bad, relative to the project.
57
Imagine that P prefers one kind of recreation to
another, that P continues to do so under full information, and that this recreation is not objectively
harmful for P, but that P would prefer the second recreation had not the first been the only
recreation available to him during an impoverished childhood. In this sort of case, we suggest,
WE should be set equal to CV.
In the second variation on the case of adaptive preference, people’s preferences change
55
See supra note __.
56
See supra text accompanying notes __.
57
Cf. L. W. Sumner, Welfare, Happiness and Ethics 156-171 (1996) (distinguishing between view that
preferences must be objectively good to be welfare-constitutive, and view that preferences must be autonomous to be
welfare-constitutive).
25 Implementing Cost-Benefit Analysis When Preferences Are Distorted
over time. P has an actual preference for the status quo, rooted in some unfortunate feature of his
background; while his “non-adaptive” or idealized preference is in favor of the project. But P’s
actual preference is not fixed; if the project were implemented, he would come to prefer it. So P’s
CV based upon status-quo-world preferences is, say, $-55, while his CV based upon project-
world preferences is, say, $25. In this sort of case, at least in theory, criteria of “adaptiveness”
could be used for choosing between P’s conflicting sets of actual preferences, even where the
project and the status quo are objectively fine and thus criteria of objective value provide no basis
for making the choice. The agency could assign P a unique WE equal to $25, on the grounds that
his actual project-world preferences are non-adaptive while his actual status-quo preferences are
adaptive. But given the especial malleability of the concept of “adaptive” preferences (even as
compared to the notion of an objectively “good” or “bad’ way of life, which seems to have more
common-sense resonance), we are quite skeptical that agencies should really be instructed to use
“adaptiveness” as a tiebreaker when status-quo and project world preferences are different.
To sum up: Adaptiveness is a separate way in which preferences can be distorted, distinct
from the lack of information and the lack of objective value. P’s preference for the status quo can
be adaptive, even if this preference is fully informed and even if the status quo is not clearly
objectively worse than the project. Thus, in theory, adaptiveness could be a separate basis for
agencies to reject CVs, and a separate ingredient in the calculation of WEs. However, this
suggestion strikes us as impracticable. In some cases, P’s adaptive preference will also be
uninformed, or objectively bad, or both, and in such a case a WE will appropriately be calculated
for P based on considerations of full information or objective value. But adaptiveness per se
should not, we think, be a component of agency decisionmaking. If P’s preference is “distorted”
solely because it is “adaptive,” and in no other way, then agencies should stick to textbook CBA
and use P’s CV
58
as the measure of the project’s welfare impact upon him.
E. Wealth distortions.
CBA is inaccurate, quite apart from the divergence between CVs and WEs, by virtue of the
fact that both measures reduce welfare impacts on project winners and losers to dollars – which
are, in turn, differentially productive of welfare in different persons. In particular, the marginal
utility (strictly, marginal increase in overall well-being) of a dollar expended by a person poor in
total wealth is generally larger than the marginal utility of a dollar expended by a rich person. The
apparent solution, here, is for agencies to weight WEs by the marginal utility of money. There are
technical problems in constructing the right weighting factor; there may also be problems in
transparency and reliability. But quite apart from technical and implementation difficulties, the
proposal that agencies correct for the distorting effect of endowments by weighting WEs raises the
subtler issues of (1) market adjustment (where rich and poor effectively undo the project picked out
by weighted CBA, since their behavior is driven by unweighted preferences
59
); (2) the possible
welfare-superiority of money transfers to agency projects; and (3) the redistributive objection,
which points out that weighted WEs (or CVs) would cause agencies to seek out redistributive
projects rather than projects that solve market failures. These are the issues we will focus upon
here.
58
We briefly described above how textbook CBA might, in theory, deal with the case where P’s
preferences are changing. See supra text accompanying note __.
59
Similar phenomena are widespread and much discussed – for example, the possibility that safety
regulations cause consumers to take less care. See, for example, W. Kip Viscusi, Fatal Tradeoffs 223-27 (1992).
Chicago Working Paper in Law and Economics 26
Suppose that an agency must decide whether to construct a park in a wealthy neighborhood
or a poor neighborhood.
60
All people have the same preferences, which include a desire for more
park space. More people live in the poor neighborhood than in the wealthy neighborhood, but the
wealthy people are willing to pay more for the park because of their lower marginal utility of
money. The agency, however, adjusts CVs using the marginal utility of money and relies upon the
adjusted CVs to justify placement of the park in the poor neighborhood.
The result of the agency’s action is that the property values in the poor neighborhood will
rise relative to the property values in the rich neighborhood. If the poor people are renters,
landlords might terminate their leases, convert to condominiums, and sell the condominiums to rich
people. The rich people move out of the old rich neighborhood, and the poor people move out of
the old poor neighborhood. Perhaps, they simply switch places. Far from benefiting poor people,
the agency’s project benefits landlords, who are likely to be relatively wealthy, while causing a
large welfare loss as people engage in unnecessary migration. It would be better to give the park to
the rich neighborhood.
61
This is an extreme version of what might happen. Another possibility is that some poor
people own their own homes. These people would benefit from the increase in property values.
But they would presumably sell out to rich people, so the result of the agency decision to place the
park in the poor rather than rich neighborhood is a transfer of wealth from rich people and poor
people who do not own their homes, to poor people who do own their homes. The rich people
lose because they must pay to move to a new neighborhood; likewise the poor people without
homes. The poor people with homes gain because of the increase in property values.
In this second case, the project of building the park in the poor neighborhood is welfare-
inferior to the project of building the park in the rich neighborhood plus arranging a lump-sum
payment from the rich people to the poor people (or poor people with homes), which would not
necessitate the uprooting and migration of large populations. However, agencies do not have the
authority to order lump-sum payments. The agency’s choice, then, is between benefiting some
poor people through a project that diminishes the welfare of other poor people and a few rich
people, or benefiting a few rich people and some poor people at the expense of other poor people.
Both are welfare-inferior to the option of building the park in the rich neighborhood plus a transfer.
Suppose finally that people cannot move and that, therefore, property values do not adjust.
The rich people will stay in the rich neighborhood and the poor people will stay in the poor
neighborhood. Suppose that the rich people’s aggregate CV is $1000, and the poor people’s
aggegate CV is $500. If the park is placed in the poor people’s neighborhood, they will obtain a
value of $500. And this is true even of the very poor people who do not own their homes. One
might argue that a better project would be the construction of the park in the rich neighborhood
60
So the two outcomes being compared by CBA are “park in wealthy neighborhood” and “park in poor
neighborhood”. One would then be designated the status quo world, the other the project world, for purposes of
calculating CVs. The discussion that follows does not depend upon which outcome, “park in wealthy
neighborhood” or “park in poor neighborhood,” is in fact designated as status quo.
How is the park funded? The funding scheme (e.g., a scheme for funding the park through taxes) might
well affect the welfare of persons in the “park in wealthy neighborhood” world, as compared to the “park in poor
neighborhood” world. But we ignore this complication.
61
See Sunstein, supra note __, at 283.
27 Implementing Cost-Benefit Analysis When Preferences Are Distorted
with a transfer, of say $600, from rich to poor.
62
What should the agency do in these three cases? In the first case, by virtue of market
adjustment, placing the park in the rich neighborhood turns out to be welfare-superior to placing
the park in the poor neighborhood. Here, it seems straightforward to us that the park should be
placed in the rich neighborhood.
63
In evaluating the project, the agency should take account of
market adjustment; if market adjustment undermines the value of a superficially attractive project,
the project should not be implemented. Because placing the park in the poor neighborhood does
not, after market adjustment, increase overall well-being, the welfare criterion counts against the
park’s placement there.
The second and third cases are more difficult. The fact that a third project – placing the park
in the rich neighborhood and transferring wealth from rich to the poor – is welfare superior to the
projects under consideration hardly seems relevant when that third project is not available to the
agency. We know of no agency in the United States that has the authority to order wealth
transfers, and there are many good reasons for denying them this authority.
Assume that this does not change, and that in the second and third cases the only options
available to the agency are the simple ones. What should the agency do? There is a plausible case
that the agency should just choose the option identified by marginal-utility-weighted CBA, namely
placing the park in the poor neighborhood.
64
After all, this is welfare-superior to placing the park
in the rich neighborhood; weighted CBA is accurate, to this extent. To be sure, it might be the case
that welfare-improving transfers through the tax and welfare system are not made because
Congress has other things on its mind, and not because the optimal distribution of wealth has been
achieved. But the agency has identified a way of increasing overall well-being and should
implement it, and if this result is welfare-inferior to an alternative that is politically impossible, that
is irrelevant.
One might object to the approach suggested here because it would give agencies a license to
search for projects that have differential impacts on rich and poor, and then approve them not
because of their public good aspects, or because they satisfy other standard “market failure”
rationales for government intervention,
65
but because of their redistributive effects. Agencies will
62
See Louis Kaplow and Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in
Redistributing Income, 23 J. Legal Stud. 667 (1994). Note, however, that an even better project than that might be
constructing the park in the poor neighborhood and transferring $600 or a larger amount from rich to poor.
63
This seems straightforward to us, insofar as the agency is solely concerned with overall well-being. If
the agency is instructed to consider both overall well-being and other moral criteria, it might have grounds for
placing the park in the poor neighborhood; although, in the particular example at hand, it is hard to see what those
grounds could be.
64
For purposes of the discussion, we shall assume that in the second case the option of placing the park in
the poor neighborhood is indeed superior, using weighted CBA (and taking account of market adjustment) to the
option of placing the park in the rich neighborhood.
65
See, for example, Stephen Breyer, Regulation and its Reform (1982) (presenting market-failure
rationales); Anthony Ogus, Regulation: Legal Form and Economic Theory (1994) (same).
Chicago Working Paper in Law and Economics 28
implement projects in poor neighborhoods until people in those neighborhoods are as rich as
people in rich neighborhoods. Weighted CBA gives agencies a license to undertake projects that
increase overall well-being just by changing the distribution of wealth. This is the redistributive
objection to weighted CBA.
The redistributive objection is a cogent one. There may be good, principled reasons
against authorizing agencies to approve projects that are welfare-increasing merely in virtue of their
redistributive effects – because such a practice produces a disincentive to the accumulation of
wealth, thereby decreasing overall well-being in the long run; or because, at some point, it invades
the property rights of the rich; or perhaps for some other reason. But if this conclusion is correct,
then the appropriate response of agencies is not to return to conventional CBA, with unweighted
CVs (or WEs). There is no reason to think that a simple cost-benefit comparison of a project and
the status quo, which uses unweighted CVs (or WEs), should generally reach the same result as a
sophisticated cost-benefit comparison of a project and the status quo, which uses weighted CVs (or
WEs) and also integrates market-adjustment effects and incentive effects into the outcomes being
compared.
Rather, we see two possible responses to the redistributive objection. First, as we
suggested above, in theory agencies should count as costs perverse incentives that might result
where CVs are weighted to correct for the declining marginal utility of wealth, i.e., in inverse
proportion to total wealth, thus producing a long-run disincentive to the accumulation of wealth.
They should also include costs that would result from market adjustments, like the migration
between neighborhoods discussed in the example above. Without consideration of market
adjustments and perverse incentives, the placement of the park in the poor neighborhood looks
better (using weighted CBA) than the placement in the rich neighborhood. With consideration of
market adjustments but not perverse incentives, the placement of the park in the poor neighborhood
looks better (using weighted CBA) than the placement in the rich neighborhood if rich and poor
can’t move (the third case described above) but not necessarily if they can (the first and second
cases). Finally, with consideration of both market adjustments and perverse incentives, the
placement of the park in the poor neighborhood may not look better (using weighted CBA) than the
placement of the park in the rich neighborhood even in the case where rich and poor can’t move.
To see how perverse incentives might be factored into agency decisionmaking, consider
once more the case of immobile neighbors and assume the following. Rational Rick, in response
to the park’s placement in the rich neighborhood, will pursue one employment plan E1. In
response to the park’s placement in the poor neighborhood, he will pursue another plan E2 that
earns him less wealth (because he has less incentive to earn wealth if he thinks that the park
agencies and other agencies will weight his CVs in inverse proportion to his wealth). Assume
further that Rick’s CV for E1, as against E2, is $200. Then $200, as weighted for Rick’s marginal
utility of wealth, could be added to the rich persons’ CVs ($1000, again appropriately weighted) in
determining the monetized benefits of placing the park in the rich neighborhood.
A second possible response to the redistributive objection is for agencies to rely upon a rule
of thumb. The problem with the first suggestion is that it may be impossible to calculate the
ancillary costs – work disincentives, market adjustment – created by a project and by the particular
technique that the agency uses to evaluate it. This is similar to the problem of calculating objective
values. A possible rule of thumb is that agencies should avoid projects that produce large and
concentrated losses, even on wealthier segments of society, and that provide minimal benefits,
29 Implementing Cost-Benefit Analysis When Preferences Are Distorted
even to poorer segments of society. EPA might rely on such a rule of thumb,
66
although it has not
given its reasons, and one might suspect that EPA avoids such projects simply because their high
visibility makes them politically dangerous. Nevertheless, there is a rationale for this rule of
thumb, and that rationale is that as the value of the project declines, and as the number of people
affected declines, the magnitude of the project’s perverse effect on work incentives and the danger
of market adjustment also decline.
IV. Some Institutional Considerations
Administrative agencies make decisions within a political structure, and have important
political purposes. They are agents (in the economic sense) of Congress, the President, and the
people. If they are not supervised, they may regulate in a way that does not serve the public
interest. The capture theory of regulation, according to which regulated industries bend agencies to
their will, identifies one kind of agency problem. More broadly, an agency might serve the
interests of its administrator, or of its bureaucracy, or of influential citizens or groups, rather than
the interests of hierarchical superiors in the political branches or the general public. This danger
might lead Congress, the President, or the courts to supervise agencies very closely. But if
agencies are supervised too closely, then the various advantages that flow from specialization and
division of labor are lost. Some balance must be struck between deference and supervision.
One technique for supervising agents (and agencies) is to require them to disclose
information about their behavior. This is the political advantage of cost-benefit analysis: it forces
agencies to be clear about the basis of their decisions, and this facilitates monitoring by other
actors. Agencies that engage in direct welfare evaluation of projects may get the evaluation right or
wrong, but it is very difficult for other actors to evaluate the agencies unless the agencies quantify
or monetize costs and benefits. Analysis of some agency actions in fact suggests that agencies do
not get it right. Agencies that do not use cost-benefit analysis make inconsistent assumptions about
valuation of life.
67
Even agencies that use cost-benefit analysis make inconsistent assumptions
about valuation of life, discount rate, and no doubt much else (see appendix), but it is easy to
identify these inconsistencies and ask the agencies to justify them.
68
If an agency assumes a high
valuation of life when justifying a regulation that injures one industry, while assuming a low
valuation of life when rejecting a regulation that injures another industry, and the regulations are in
other respects identical, suspicions will be aroused that the second industry has captured the
agency.
69
The tables in the appendix shows that agencies have tremendous freedom in choosing
66
See True, supra note __, at 324.
67
See Viscusi, supra note __, at 264; John F. Morrall, III, A Review of the Record, 10 Regulation 13,
30 (1986).
68
See United States General Accounting Office, supra note __.
69
This is an interpretation of Corrosion Proof Fittings v. EPA, 947 F.2d 1201, 1222-23 (5th Cir. 1991),
which criticized EPA for defending a regulation on the basis of a valuation for lives saved that is higher than that
used to reject other regulations.
Chicago Working Paper in Law and Economics 30
discount rates and valuations of life, despite efforts by OMB to impose some order.
70
An agency
can apparently use a discount rate of 0.03 and a valuation of life of $5.8 million in one regulation,
and a discount rate of 0.1 and a valuation of life of $1.5 million in another regulation. That means
that the agency could assert that a regulation that, say, saves 10 lives per year for 5 years produces
benefits of as much as $266 million, or as little as $57 million. Cost-benefit analysis constrains
agencies, but not as much as its proponents might hope.
Given that CBA currently imposes little constraint on agencies – at least, when the
regulation will produce statistical deaths over a long period of time – one might hesitate about
giving agencies more freedom by allowing them to correct for preference distortions. If agencies
are permitted to modify CVs in order to account for distortions in preferences, then (1)
inconsistencies in assumptions will be difficult to identify, and indeed (2) agencies may be able to
conceal improper goals. This is a serious possibility, but the harm can be limited if agencies are
required to explain deviations from CV baselines, and use uniform adjustments. If an agency
adjusts CVs to account for wealth differences, for example, it should be required to explain what
the wealth differences are, and what weightings are used to make the adjustments. The agency’s
argument for the adjustment will have to be reasonable, and, more important, it will have to be
consistent across regulations, so that the agency cannot opportunistically change assumptions in
order to justify some regulations and not others.
V. Conclusion: Some Proposals for Reform
CBA poses a number of difficult conceptual problems. We have discussed five; these are:
the treatment of disinterested preferences, of preferences distorted by lack of information,
adaptation, and objective badness, and of preferences whose influence is inflated or deflated by
relative wealth. If agencies did not face information and decision costs, and were not subject to
political constraints, they could maximize overall well-being in several straightforward ways.
• They would ignore disinterested preferences, or else treat widespread moral
commitments as (non-monetized) constraints on projects.
• They would use informed preferences when persons will become informed as a
result of the project or when preferences are instrumental rather than intrinsic; they
would otherwise rely, at least to some extent, on uninformed preferences; and they
would consider information dissemination as a potential supplement to the project,
with its own benefits and costs.
• They would discount adaptive preferences, and rely to some extent on idealized,
“non-adaptive” preferences in calculating WEs – if, for example, such preferences
will become actual as a result of the project and even, perhaps, if adaptive
preferences are entrenched.
• They would ignore objectively bad preferences.
• They would adjust for wealth distortions by weighting for marginal utility.
But agencies do face information and decision costs. Such fallible agencies must use
70
See Office of Management and Budget, Benefit-Cost Analysis of Federal Programs: Guidelines and
Discounts, 57 Fed. Reg. 53,519 (1992).
31 Implementing Cost-Benefit Analysis When Preferences Are Distorted
whatever decision procedure minimizes the sum of these costs and the cost of error. Although it is
hard to generalize, a number of comments can be made.
Even fallible agencies can successfully ignore objectively bad preferences when preferences
violate widespread, uncontroversial intuitions about valuable and worthless behavior. Moreover,
fallible agencies can successfully ignore disinterested preferences in certain situations: they should
not use existence values for environmental entities. However, the appropriate response is not
always so straightforward. A person might have a high CV for, say, a public commuter train both
because of a self-interested preference for convenient transportation and a disinterested preference
for environmentally sound transportation. A person might have a high CV for a bridge both
because it reduces his cost of transportation and it annoys his neighbors. These CVs would be
reflected in market behavior as well as in survey results. In such cases of mixed preferences, the
ideal agency would sort them out, but a real agency probably cannot. The real agency might
plausibly choose to rely on traditional CVs on the theory that self-interested preferences tend to
have much greater influence on CVs, except in domains where it seems likely that disinterested
preferences dominate. The most important such domains are ones where the actual CVs are low,
so budget constraints have little influence, moral feelings are powerful, and the direct impact of the
project is small. Environmental regulation is such a domain, and that is why existence values
should be ignored.
Real agencies are, we suspect, unlikely to be able to distinguish adaptive preferences from
non-adaptive preferences. Accordingly, we think that agencies should ignore this category. It is
likely that most extreme cases are better handled as objectively bad preferences. For example,
preferences of drug addicts, whether or not adaptive, are generally considered objectively bad.
Indeed, the fact that agencies would ignore the preferences of non-addicted drug users suggests
that objective value is the more appropriate category.
71
When preferences are uninformed, agencies should sometimes make adjustments. If
projects that are based on informed preferences actually improve well-being, either because people
do not need information in order to receive the benefit, or because they are likely to obtain
information after the project is implemented, then there is a good case for constructing informed
preferences. However, when uninformed people do not become informed as a result of the
project, matters are more complex, as we discussed in Part III.
We are more optimistic about restricting preferences on the basis of information than on the
basis of adaptation for two reasons. First, it is easier for agencies to derive informed preferences
from uninformed preferences, than non-adaptive preferences from adaptive preferences. One can,
for example, compare the behavior of people who are informed about nutrition and people who are
uninformed about nutrition; one can observe changes in behavior as people obtain information; and
so on. But it is, even as a conceptual matter, hard to distinguish adaptive preferences from a non-
adaptive preferences. Many influences contribute to the formation of preferences; distinguishing
“corrupt” from “pure” influences may be impossible or even meaningless. Second, it is easier to
give people information than it is to change their preferences. Indeed, people will seek out
information because it can help them satisfy their desires; but people commonly resist efforts to
change their preferences. The first requires education; the second requires brain-washing.
Finally, when CVs are distorted because of wealth differences, real agencies might use
distributive weightings and then make further corrections to deal with the problems of market
71
See supra note __.
Chicago Working Paper in Law and Economics 32
adjustment and perverse incentives. We have outlined how these corrections could be made. But
the more practicable course, we think, is for agencies to rely upon the “rule of thumb” suggested
above – to avoid projects that have a large impacts upon the distribution of wealth.
Further, it is unclear whether the basic idea of distributive weighting is itself a feasible one.
It may be just too complicated for Congress or OMB to specify a methodology for weighting CVs,
in inverse proportion to total wealth or income, that is reasonably accurate (in compensating for the
declining marginal utility of wealth) and that agencies can use with reasonable success. The
feasibility of distributive weighting has been much debated, without a clear resolution, by welfare
economists. If distributive weighting is not feasible, then agencies should probably use unadjusted
CVs when the distribution of wealth among the winners does not differ much from the distribution
among the losers. When the distributions differ greatly, an agency could refrain from
implementing the project. One possible alternative route would be to inform Congress and
hierarchical superiors in the executive branch; these officials might be willing to arrange for
compensation of the losers or some other politically desirable outcome. Finally, an agency could
use a procedure other than CBA for comparing the project and status quo
72
– in effect, a procedure
that reaches the same kind of results as weighted CBA, but is more feasible – but this would lead
back to the problem of market adjustment and perverse incentives. We are skeptical that agencies
can really take account of these.
A comment about this last point should be added. Supporters of CBA have traditionally
argued that it avoids distributional judgments and allows agencies to focus on efficiency
improvements that their expertise puts them in a position to identify. Critics of CBA have pointed
out that distributional judgments cannot be avoided. The efficiency of a project is a function of its
distributive effects. Unadjusted CVs are unacceptable because they reward people on the basis of
wealth, yet wealthy people are on average likely to value a dollar on the margin less than poor
people are. Properly adjusted CVs would result in possibly massive redistribution to the poor as
agencies implemented projects that tax the rich (because their marginal dollars are worth little to
them) and benefit the poor (who can then use valuable marginal dollars for other purposes). Our
view is that in theory agencies should take account of the costs of market adjustments and work
disincentives, and if they could do this, then properly adjusted CBA would not result in a massive
redistribution of wealth. In practice, agencies are unlikely to be able to calculate these costs, so
certain broad constraints – against projects that have large impacts on the distribution of wealth, for
example – might be justified. This may be a rough description of agency practice, but there is
much room for improvement.
72
See Adler and Posner, supra note __, at __ (discussing multidimensional assessment).
33 Implementing Cost-Benefit Analysis When Preferences Are Distorted
Appendix
Table 1: Valuations of Life
AGENCY REGULATION CITATION VALUE
($ mil.)
Department of Transportation –
Federal Aviation Administration
Proposed Establishment of the
Harlingen Airport Radar Service
Area, TX
55 FR 32064
August 6, 1990
1.5
Department of Agriculture – Food
Safety and Inspection Service
Pathogen Reduction: Hazard
Analysis and Critical Control Point
Systems
61 FR 38806
July 25, 1996
1.6
Department of Health and Human
Services – Food and Drug
Administration
Regulations Restricting the Sale
and Distribution of Cigarettes and
Smokeless Tobacco to Protect
Children and Adolescents
61 FR 44396
August 28, 1996
2.5
Department of Transportation –
Federal Aviation Administration
Aircraft Flight Simulator Use in
Pilot Training, Testing, and
Checking and at Training Centers
61 FR 34508
July 2, 1996
2.7
Environmental Protection
Agency
Protection of Stratospheric Ozone 53 FR 30566
August 12, 1988
3
Department of Health and Human
Services – Food and Drug
Administration
Proposed Rules to Amend the Food
Labeling Regulations
56 FR 60856
November 27, 1991
3
Department of Transportation –
Federal Aviation Administration
Financial Responsibility
Requirements for Licensed Launch
Activities
61 FR 38992
July 25, 1996
3
Department of Agriculture – Food
and Nutrition Service
Proposed National School Lunch
Program and School Breakfast
Program
59 FR 30218
June 10, 1994
1.5, 3.0
Environmental Protection
Agency
National Ambient Air Quality
Standards for Particulate Matter
62 FR 38652
July 18, 1997
4.8
Environmental Protection
Agency
National Ambient Air Quality
Standards for Ozone
62 FR 38856
July 18, 1996
4.8
Department of Health and Human
Services – Food and Drug
Administration
Medical Devices: Current Good
Manufacturing Practice
61 FR 52602
October 7, 1996
5
Department of Health and Human
Services – Public Health Service, Food
and Drug Administration
Quality Mammography Standards 62 FR 55852
October 28, 1997
5
Environmental Protection
Agency
Requirements for Lead-Based Paint
Activities in Target Housing and
Child-Occupied Facilities
61 FR 45778
August 29, 1996
5.5
Environmental Protection
Agency
National Primary Drinking Water
Regulations: Disinfectants and
Disinfection Byproducts
63 FR 69390
December 16, 1998
5.6
Environmental Protection
Agency
Radon in Drinking Water Health
Risk Reduction and Cost Analysis
64 FR 9560
February 26, 1999
5.8
Chicago Working Paper in Law and Economics 34
Table 2: Discount Rates
73
AGENCY REGULATION DISCOUNT RATE
(COSTS/BENEFITS)
EPA Emission Standards for Locomotives and Locomotive
Engines (1997)
7 / 7
EPA Requirements for Lead-Based Paint (1996) 3 / 3
NRC License Term for Medical Use Licenses (1997) 7 / not quantified
OSHA Respirator Protection (1998) 7 / not quantified
OSHA Indoor Air Quality (1994) 10 / not quantified
FDA Food Labeling Regulations (1993) 5 / not quantified
FDA Regulations Restricting the Sale and Distribution of
Cigarettes and Smokeless Tobacco to Protect Children and
Adolescents (1996)
not quantified / 3
FAA Aircraft Operator Security (1997) 7 / 7
NHTSA Federal Motor Vehicle Safety Standards; Lamps, Reflective
Devices and Associated Equipment (1997)
2-10 / 2-10
Consumer Product
Safety Commission
Requirements for Labeling of Retail Containers of Charcoal
(1996)
5, 10 / 5, 10
73
Source: Edward R. Morrison, Judicial Review of Discount Rates Used in Regulatory Cost-Benefit
Analysis, 65 U. Chi. L. Rev. 1333, 1364-69 (1998).
All rights reserved. Readers with comments should address them to:
Matthew D. Adler
University of Pennsylvania Law School
3400 Chestnut Street
Philadelphia, PA 19104
Eric A. Posner
University of Chicago Law School
1111 East 60th Street
Chicago, IL 60637
Chicago Working Papers in Law and Economics
(Second Series)
1. William M. Landes, Copyright Protection of Letters, Diaries
and Other Unpublished Works: An Economic Approach (July
1991).
2. Richard A. Epstein, The Path to The T. J. Hooper: The Theory
and History of Custom in the Law of Tort (August 1991).
3. Cass R. Sunstein, On Property and Constitutionalism
(September 1991).
4. Richard A. Posner, Blackmail, Privacy, and Freedom of
Contract (February 1992).
5. Randal C. Picker, Security Interests, Misbehavior, and
Common Pools (February 1992).
6. Tomas J. Philipson & Richard A. Posner, Optimal Regulation
of AIDS (April 1992).
7. Douglas G. Baird, Revisiting Auctions in Chapter 11 (April
1992).
8. William M. Landes, Sequential versus Unitary Trials: An
Economic Analysis (July 1992).
9. William M. Landes & Richard A. Posner, The Influence of
Economics on Law: A Quantitative Study (August 1992).
10. Alan O. Sykes, The Welfare Economics of Immigration Law: A
Theoretical Survey With An Analysis of U.S. Policy (September
1992).
11. Douglas G. Baird, 1992 Katz Lecture: Reconstructing Contracts
(November 1992).
12. Gary S. Becker, The Economic Way of Looking at Life
(January 1993).
13. J. Mark Ramseyer, Credibly Committing to Efficiency Wages:
Cotton Spinning Cartels in Imperial Japan (March 1993).
14. Cass R. Sunstein, Endogenous Preferences, Environmental Law
(April 1993).
15. Richard A. Posner, What Do Judges and Justices Maximize?
(The Same Thing Everyone Else Does) (April 1993).
16. Lucian Arye Bebchuk and Randal C. Picker, Bankruptcy Rules,
Managerial Entrenchment, and Firm-Specific Human Capital
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17. J. Mark Ramseyer, Explicit Reasons for Implicit Contracts: The
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18. William M. Landes and Richard A. Posner, The Economics of
Anticipatory Adjudication (September 1993).
19. Kenneth W. Dam, The Economic Underpinnings of Patent
Law (September 1993).
20. Alan O. Sykes, An Introduction to Regression Analysis
(October 1993).
21. Richard A. Epstein, The Ubiquity of the Benefit Principle
(March 1994).
22. Randal C. Picker, An Introduction to Game Theory and the
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23. William M. Landes, Counterclaims: An Economic Analysis
(June 1994).
24. J. Mark Ramseyer, The Market for Children: Evidence from
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25. Robert H. Gertner and Geoffrey P. Miller, Settlement Escrows
(August 1994).
26. Kenneth W. Dam, Some Economic Considerations in the
Intellectual Property Protection of Software (August 1994).
27. Cass R. Sunstein, Rules and Rulelessness, (October 1994).
28. David Friedman, More Justice for Less Money: A Step Beyond
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29. Daniel Shaviro, Budget Deficits and the Intergenerational
Distribution of Lifetime Consumption (January 1995).
30. Douglas G. Baird, The Law and Economics of Contract
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31. Daniel Kessler, Thomas Meites, and Geoffrey P. Miller,
Explaining Deviations from the Fifty Percent Rule: A
Multimodal Approach to the Selection of Cases for Litigation
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32. Geoffrey P. Miller, Das Kapital: Solvency Regulation of the
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33. Richard Craswell, Freedom of Contract (August 1995).
34. J. Mark Ramseyer, Public Choice (November 1995).
35. Kenneth W. Dam, Intellectual Property in an Age of Software
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36. Cass R. Sunstein, Social Norms and Social Roles (January
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37. J. Mark Ramseyer and Eric B. Rasmusen, Judicial Independence
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38. Richard A. Epstein, Transaction Costs and Property Rights: Or
Do Good Fences Make Good Neighbors? (March 1996).
39. Cass R. Sunstein, The Cost-Benefit State (May 1996).
40. William M. Landes and Richard A. Posner, The Economics of
Legal Disputes Over the Ownership of Works of Art and Other
Collectibles (July 1996).
41. John R. Lott, Jr. and David B. Mustard, Crime, Deterrence, and
Right-to-Carry Concealed Handguns (August 1996).
42. Cass R. Sunstein, Health-Health Tradeoffs (September 1996).
43. Douglas G. Baird, The Hidden Virtues of Chapter 11: An
Overview of the la and Economics of Financially Distressed
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44. Richard A. Posner, Community, Wealth, and Equality (March
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45. William M. Landes, The Art of Law and Economics: An
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46. Cass R. Sunstein, Behavioral Analysis of Law (April 1997).
47. John R. Lott, Jr. and Kermit Daniel, Term Limits and Electoral
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48. Randal C. Picker, Simple Games in a Complex World: A
Generative Approach to the Adoption of Norms (June 1997).
49. Richard A. Epstein, Contracts Small and Contracts Large:
Contract Law through the Lens of Laissez-Faire (August 1997).
50. Cass R. Sunstein, Daniel Kahneman, and David Schkade,
Assessing Punitive Damages (with Notes on Cognition and
Valuation in Law) (December 1997).
51. William M. Landes, Lawrence Lessig, and Michael E.
Solimine, Judicial Influence: A Citation Analysis of Federal
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52. John R. Lott, Jr., A Simple Explanation for Why Campaign
Expenditures are Increasing: The Government is Getting
Bigger (February 1998).
53. Richard A. Posner, Values and Consequences: An Introduction
to Economic Analysis of Law (March 1998).
54. Denise DiPasquale and Edward L. Glaeser, Incentives and
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55. Christine Jolls, Cass R. Sunstein, and Richard Thaler, A
Behavioral Approach to Law and Economics (May 1998).
56. John R. Lott, Jr., Does a Helping Hand Put Others At Risk?:
Affirmative Action, Police Departments, and Crime (May
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57. Cass R. Sunstein and Edna Ullmann-Margalit, Second-Order
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58. Jonathan M. Karpoff and John R. Lott, Jr., Punitive Damages:
Their Determinants, Effects on Firm Value, and the Impact of
Supreme Court and Congressional Attempts to Limit Awards
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59. Kenneth W. Dam, Self-Help in the Digital Jungle (August
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60. John R. Lott, Jr., How Dramatically Did Women’s Suffrage
Change the Size and Scope of Government? (September 1998)
61. Kevin A. Kordana and Eric A. Posner, A Positive Theory of
Chapter 11 (October 1998)
62. David A. Weisbach, Line Drawing, Doctrine, and Efficiency in
the Tax Law (November 1998)
63. Jack L. Goldsmith and Eric A. Posner, A Theory of Customary
International Law (November 1998)
64. John R. Lott, Jr., Public Schooling, Indoctrination, and
Totalitarianism (December 1998)
65. Cass R. Sunstein, Private Broadcasters and the Public Interest:
Notes Toward A “Third Way” (January 1999)
66. Richard A. Posner, An Economic Approach to the Law of
Evidence (February 1999)
67. Yannis Bakos, Erik Brynjolfsson, Douglas Lichtman, Shared
Information Goods (February 1999)
68. Kenneth W. Dam, Intellectual Property and the Academic
Enterprise (February 1999)
69. Gertrud M. Fremling and Richard A. Posner, Status Signaling
and the Law, with Particular Application to Sexual Harassment
(March 1999)
70. Cass R. Sunstein, Must Formalism Be Defended Empirically?
(March 1999)
71. Jonathan M. Karpoff, John R. Lott, Jr., and Graeme Rankine,
Environmental Violations, Legal Penalties, and Reputation
Costs (March 1999)
72. Matthew D. Adler and Eric A. Posner, Rethinking Cost-
Benefit Analysis (April 1999)
73. John R. Lott, Jr. and William M. Landes, Multiple Victim
Public Shooting, Bombings, and Right-to-Carry Concealed
Handgun Laws: Contrasting Private and Public Law
Enforcement (April 1999)
74. Lisa Bernstein, The Questionable Empirical Basis of Article 2’s
Incorporation Strategy: A Preliminary Study (May 1999)
75. Richard A. Epstein, Deconstructing Privacy: and Putting It
Back Together Again (May 1999)
76. William M. Landes, Winning the Art Lottery: The Economic
Returns to the Ganz Collection (May 1999)
77. Cass R. Sunstein, David Schkade, and Daniel Kahneman, Do
People Want Optimal Deterrence? (June 1999)
78. Tomas J. Philipson and Richard A. Posner, The Long-Run
Growth in Obesity as a Function of Technological Change
(June 1999)
79. David A. Weisbach, Ironing Out the Flat Tax (August 1999)
80. Eric A. Posner, A Theory of Contract Law under Conditions of
Radical Judicial Error (August 1999)
81. David Schkade, Cass R. Sunstein,
and Daniel Kahneman,
Are Juries Less Erratic than Individuals? Deliberation,
Polarization, and Punitive Damages (September 1999)
82. Cass R. Sunstein, Nondelegation Canons (September 1999)
83. Richard A. Posner, The Theory and Practice of Citations
Analysis, with Special Reference to Law and Economics
(September 1999)
84. Randal C. Picker, Regulating Network Industries: A Look at
Intel (October 1999)
85. Cass R. Sunstein, Cognition and Cost-Benefit Analysis
(October 1999)
86. Douglas G. Baird and Edward R. Morrison, Optimal Timing
and Legal Decisionmaking: The Case of the Liquidation
Decision in Bankruptcy (October 1999)
87. Gertrud M. Fremling and Richard A. Posner, Market Signaling
of Personal Characteristics (November 1999)
88. Matthew D. Adler and Eric A. Posner, Implementing Cost-
Benefit Analysis When Preferences Are Distorted (November
1999)
