Why Relative Economic Position Does Not Matter: A Cost-Benefit Analysis

Abstract

The current debate over cost-benefit concerns in agencies' evaluations of government regulations is not so much whether to consider costs and benefits at all but rather what belongs in the estimated costs and benefits. Overlaid is the long-standing belief that the distribution of costs and benefits needs some consideration in policy evaluations. In a recent article in the University of Chicago Law Review, Robert Frank and Cass Sunstein proposed a relatively simple method for adding distributional concerns to policy evaluation that enlarges the typically constructed estimates of the individual's willingness to pay for safer jobs or safer products. One might pay more for safety if it were the result of a government regulation that mandated greater safety across-the-board. Frank and Sunstein argue that the reason for enlarging current estimates is that someone who takes a safer job or buys a safer product gives up wages or pays a higher price, which then moves him or her down in the ladder of income left over to buy other things. Alternatively, a worker who is given a safer job via a government regulation will have no relative income consequences if all workers have lower pay. We show that when considering the core of the Frank and Sunstein proposal carefully one concludes that current regulatory evaluations should be left alone because there is no reason to believe that relative positional effects can be well identified quantitatively, are important to personal decisions in general, or are important to well constructed cost-benefit calculations of government regulations.