Potential welfare and the sum of individual compensating or equivalent variations

We investigate under which conditions the sign of the sum of both the individual compensating and equivalent variations correctly indicates changes in potential welfare. Our results reproduce exactly those of Chipman and Moore for the National Income Test, which did not rely on individual measures of welfare directly related to consumers' preferences:

• 1.(i) a necessary and sufficient condition for the new test to be valid is that individual preferences are identical and homothetic; and
• 2.(ii) if the distribution of income is constant and preferences are homothetic, then the new test is valid only if preferences are also identical.

     

Changes in health-related quality of life: a compensating income variation approach

This paper investigates the relationship between negative changes in health and life satisfaction, using a sample from the Household, Income and Labour Dynamics of Australia Survey. We use panel data models and estimate the life satisfaction impact of several different changes in health status to calculate the Compensating Income Variation (CIV) of them. Our work innovates with respect to the existing literature by using a more robust CIV method that takes account of the potential measurement error in income. Further, we produce the first set of monetary values for health losses using SF-6D utility values, one of the main measures used to estimate and value health change for economic evaluation. We show that negative changes in SF-6D are significantly associated with a reduction in life satisfaction, and the starting point matters: a drop of 0.1 in SF-6D score is associated with a decrease of 0.12 points in life satisfaction if the starting utility value is 0.8, but the effect is 100% higher if the SF-6D starting point is 0.7. More generally, we find that a 0.1 deterioration in SF-6D has a strong association with life satisfaction and that the CIV value is substantial (over US$ 120,000).     

The impact of state economic differentials on household welfare and labor force behavior

This paper calculates state-specific income expectations for low-income households, using a simultaneous model of household labor force and welfare participation decisions. A variety of simulations indicate the interlocking effects of existing state differences in welfare, wages and taxes on work/welfare choices and income. Significant differences among similar households in different states occur. Equalization of welfare benefits eliminates some but not all of these differences, but generates potentially serious policy problems for the states.     

Health-related quality of life and compensating income variation for 18 health conditions in Iceland

ABSTRACT

Using data from an Icelandic health and well-being survey, carried out in 2007, 2009, and 2012, we estimate the value of health-related suffering in two different ways. Our primary aim is to obtain the monetary compensation needed to maintain the same level of well-being with and without 18 health conditions using the compensating-income-variation approach. This method employs individual well-being measures with no hypothetical situations involved, thus offering a solution to biases of frequently used methods to value non-marketed goods. We also use zero-one normalization of regression coefficients to estimate health-related quality-of-life weights. Results from monetary valuations indicate that 1,685,594 USD are needed per year to compensate for the presence of melancholy, 206,273 USD for frequent headaches, 153,396 USD for severely low vision, and 80,824 USD for severe monthly menstrual cramps. This research adds to the literature by employing two rarely used methods to a range of health conditions. By valuing several different conditions with the same sample and methodology this research provides a ranking between the conditions, aiding policy makers in prioritizing scarce resources. We do however advise against using the normalization method for policy purposes at this point, due to the deviation of results from the general literature.     

Commons as insurance and the welfare impact of privatization

It is shown here that, despite the efficiency gains from privatization, when markets are incomplete, all individuals may be made worse off by privatization, even when the resource is equitably privatized. Such market incompleteness is common in the developing world and can explain the often encountered resistance to efficiency enhancing privatizing reforms, especially in the case of village level landholdings and forests. The advantage of common held property arises because of its superior insurance properties (which tend to provide income maintenance in low states). Sufficient conditions are established under which any feasible insurance scheme under private property cannot ex ante Pareto dominate allocations under the commons.     

The limits of the welfare state

The purpose of this paper is to discuss the links between the welfare state and economic development using Swedish data between 1970 and 1995. Our main arguments are that political decisions give rise to long-term structural changes in welfare that do not follow structural changes in the economy. Changes in the business cycle may strengthen or weaken these long-term effects. The main results point to the rising problem that face a society with a high degree of labor participation, universal coverage in social insurance, and a relatively low growth rate. There is a hidden labor market problem in social insurance. The redistribution policy is based on a short-run perspective affecting long-run effects negatively. The process in political decision may be considered as a source of government failure.     

The welfare economics of a health plan merger

Recently, two large health maintenance organizations (HMOs) in Minneapolis merged to form a single company with over half of the total Twin Cities HMO enrollment. This paper strongly suggests that the merger will have adverse consequences for consumers. I use a model of health plan rivalry and empirical demand functions to predict that health insurance premiums in 6 Twin Cities firms will rise by as much as 19 percent after the merger. Next, I show how to calculate the loss in consumer surplus in a discrete choice model and predict that the merger will reduce surplus by 4.4% on average. Several objections to these conclusions are considered but, on the whole, the analysis raises serious concerns for public policy toward HMO mergers.     

Fan welfare maximization as a club objective in a professional sports league

Motivated by aspects of European soccer club governance (members' clubs supporters' trusts), a first formal analysis of fan welfare maximization as a club objective in a sports league is provided, with comparisons to objectives studied previously (profit and win maximization). Positive comparisons focus on team qualities, ticket prices, attendances and the impact of capacity crowds; empirically observed ticket black markets and inelastic pricing are consistent only with fan welfare maximization. Normatively, social welfare (aggregate league surplus) is well-served by a league of fan welfare maximizers, or sometimes win maximizers, but not profit maximizers; leagues should not normally make profits.     

The perverse effect of environmental regulation on emissions: The role of product-mix changes

We study the effect of environmental regulation (taxation) on emissions when the only available abatement method consists of product-mix changes. Firms choose to produce one or both varieties of a product—a pollution-intensive (dirty) and a non-pollution-intensive (green)—and compete in a differentiated Cournot duopoly. We characterize the equilibrium market structure as a function of the tax rate and show that increases in the tax can promote product-mix changes that lead to a jump in emissions for some tax range, an effect we call the perverse effect of taxation. Our work emphasizes the key role horizontal product differentiation in this process and shows that the perverse effect does not require the presence of vertical product differentiation. Further, the perverse effect of taxation is especially strong in the presence of incomplete regulation, that is, when only one of the markets is subject to taxation.     

The uncertain foundations of the welfare state

The welfare state is often portrayed as provider of insurance against ‘uncertainties’, in Knight's (1921) sense of the term, which would be refused or underinsured on private markets. This image conflicts with the standard economic model of risk exchange founded on the subjective interpretation of probability, which predicts that all individual uncertainties will be insured by private markets. Our aim in this paper is to explain why this prediction fails and, building on contributions to decision theory that take seriously the idea of Knightian uncertainty, to show why social insurance may be justified.     

Tightening a welfare system: the effects of benefit denial on future welfare receipt

We derive Local Average Treatment Effect estimates of the impact of welfare benefit denial on future receipt using a unique experiment involving reassessment of some applicants who were originally slated to receive benefits. We find evidence of considerable heterogeneity among applicants. Our results support a model with a peripheral group who exhibit scarring effects from being granted benefits and a core group who do not. The core group moves quickly back onto welfare when they are denied benefits. Even for the peripheral group, benefit denial has intermediate term, but not permanent, impacts.     

The welfare costs of corruption

Corruption has been shown to affect a variety of economic indicators, especially GDP per capita. However, as GDP is not a genuine indicator of welfare, it may reflect the welfare costs of corruption only in an incomplete way. This article uses self-rated subjective well-being as an empirical approximation to general welfare and shows that cross-national welfare?–?operationalized in this way?–?is affected by corruption not only indirectly through GDP, but also directly through nonmaterial factors. This article estimates the size of these effects as well as their monetary equivalent. The direct effect?–?not previously investigated in the corruption literature?–?is found to be substantially larger than the indirect effect.     

The welfare economics of the socialization of commodities

Socialization is defined for the purpose of this paper as the acquisition by the goverment of the total output of a commodity such as medical services and redistribution of that commodity equally to all citizens. Simple general equilibrium models are constructed to show that when decisions are reached by majority rule a commodity is more likely to be socialized the greater the inequality of income in the community and the less diverse the tastes of individuals for that commodity. The interests of producers of commodities are also taken into account, and strategic aspects of voting about socialization are discussed.     

The welfare effect of bargaining power in the licensing of a cost-reducing technology

This study considers licensing of a cost-reducing technology through bargaining between a technology-holding firm and its rival firm in a Cournot duopoly market. To consider the relative bargaining power of both firms, the asymmetric Nash bargaining solution is applied as our solution. Then, we specify the combinations of lump-sum fee and per-unit royalty that are realized through bargaining, and examine the effect on social welfare of the technology-holding firm’s bargaining power. The principal findings are as follows. Regardless of the technology-holding firm’s bargaining power, pure royalty licensing is carried out, and social welfare is non-increasing in its bargaining power. In our model, licensing through a take-it-or-leave-it offer, which is often assumed in the literature, is regarded as the case in which the technology-holding firm has full bargaining power. Thus, the result on social welfare implies that the take-it-or-leave-it offer licensing mechanism leads to the socially worst outcome.     

The welfare cost of monopolistic competition: a quantitative assessment

This paper quantifies the welfare cost of monopolistic competition in a simple parametric class of endogenous growth models, embedding the neoclassical growth framework as a special case. We put particular emphasis on taking transitional dynamics into account. In doing so, we develop an original two-step numerical procedure to compute the value function. We find for conservative calibrations that the welfare cost of monopolistic competition can be anywhere between 0.4 and 1.2% of consumption, depending on whether labor is elastically or inelastically supplied.