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Improving the Practice of Benefit Transfer: A Preference Calibration Approach (2000)

Paper Number: EE-0430

Document Date: 02/01/2000

Author(s):  Smith, V. Kerry; Van Houtven, George L.; Pattanayak, Subhrendu; Bingham, Tayler H.

Subject Area(s): Economic Analysis, Benefits Analysis, Benefits Transfer, Preference Calibration

Keywords: Economic Analysis, Benefits Analysis, Benefits Transfer, Preference Calibration

Abstract:  

This document proposes a methodology for improving the way in which available information is used to develop economic benefit estimates. Although benefit transfer offers the potential to economize on the time and resources typically needed to perform policy-specific studies, as we discuss below, its implementation is not without challenges, and there is scope for improving and expanding its application. In this report, the authors propose an adaptation to the more typically applied benefit transfer practices. Economic theory posits that individuals’ WTP for environmental improvements is ultimately defined by the structure of their preferences. The authors' proposed benefit transfer approach relies on a more explicit specification of this preference structure. As such, it offers the potential for generating benefit estimates that are more consistent with economic theory in their view. This report treats the benefit transfer problem as one requiring the identification of individual preferences for the environmental resources of interest. The most important practical insight from the approach is a requirement that each source of benefit estimates and each desired decomposition of these estimates should, in principle, link to a common specification for individual preferences. The approach uses existing studies to “calibrate” a preference structure and, therefore, a willingness-to-pay (WTP) function as well. The WTP function can, in principle, be transferred and applied to evaluate different degrees of environmental quality changes that are relevant for policy purposes.

The report argues that the proposed approach offers a more systematic way to construct benefit measures under the time and resource constraints typically facing policy analysts. As described above, the primary advantage of this approach is that it provides a means of generating benefit estimates that are more consistent with individual behavior. This is because the estimates are designed to take explicit account of the assumptions regarding individuals’ preferences and the constraints they face. As such, this approach, according to the report, permits the integration of multiple estimates of the value of nonmarket resources and helps to ensure consistency between economic benefit measures for different resource uses. As a practical matter, however, increases in the diversity of benefit measures incorporated into the analysis will necessarily add to the difficulties posed for applying the approach. The approach also makes explicit the roles of analyst judgment in developing the connections between what has been measured and what is needed for each policy task.

This report is part of the  Environmental Economics Research Inventory.

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  • Improving the Practice of Benefit Transfer: A Preference Calibration Approach (2000) (PDF)(66 pp, 433 K, 02/01/2000, EE-0430)
    Report has methodology for improving the way in which available information is used to develop economic benefit estimates. Although benefit transfer offers the potential to economize on the time and resources typically needed to perform policy-specific studies, as we discuss below, its implementation is not without challenges, and there is scope for improving and expanding its application. In this report, the authors propose an adaptation to the more typically applied to benefit transfer.