"The effect of income choice on bias in policy decisions made using cost-benefit analyses"

Abstract

Cost-Benefit Analysis (CBA) is often used in policy decisions to determine the economic value of various choices. Although the effects of income disparity are well accepted, one of the reasons for the success of this type of analysis is that many policy-makers and analysts consider the results of a well-crafted analysis to be largely free of partisan or political bias. Here I propose that tradeoff between the benefits of various possible jobs or careers introduce a significant bias into values imputed based upon willingness to pay measures. In particular, I demonstrate why we might expect the values of various segments of society to be differentially appreciated by CBA. Empirical evidence is presented indicating that there is a significant negative correlation between the importance an individual places on income and the willingness of that individual to forgo consumption in favor of environmental improvement, as well as a correlation between the importance of income and actual income. These results suggest that CBA as a tool of welfare economics is likely to be biased against environmental protection because concerned individuals are likely to choose careers which do not maximize consumption, thus decreasing their ability to pay for both real and hypothetical environmental improvements. Moreover, the size of this bias appears to be large.