TY - JOUR
T1 - Money-metrics in local welfare analysis
T2 - Pareto improvements and equity considerations
AU - Schlee, Edward E.
AU - Ali Khan, M.
N1 - Publisher Copyright:
© 2023 Elsevier Inc.
PY - 2023/10
Y1 - 2023/10
N2 - We identify local Pareto improvements from a valuation equilibrium, and extend the results of Hirshleifer, Arrow-Lind, Milleron, and Radner on the evaluation of small projects to behavioral or nonstandard choice models. We use the sign of directional derivative of the sum of McKenzie-Samuelson money metrics to evaluate small projects, but, rather than assume its differentiability, furnish preference conditions that guarantee it. Our methods yield, as an unintended consequence, (i) a refutation of Samuelson's (1974) conjecture that the money metric is locally concave in a neighborhood of a demand point, thereby settling an issue open for five decades; and (ii) a substantive extension of the 1988 Blackorby-Donaldson theorem that the money metric is concave in consumption only if preferences are quasihomothetic. We explain some equity implications of our local-welfare result, and as part of the rehabilitation of money metrics, suggest a case for using a second-order approximation to a money metric for local welfare. We illustrate when our results hold and don't hold with several non-standard choice models.
AB - We identify local Pareto improvements from a valuation equilibrium, and extend the results of Hirshleifer, Arrow-Lind, Milleron, and Radner on the evaluation of small projects to behavioral or nonstandard choice models. We use the sign of directional derivative of the sum of McKenzie-Samuelson money metrics to evaluate small projects, but, rather than assume its differentiability, furnish preference conditions that guarantee it. Our methods yield, as an unintended consequence, (i) a refutation of Samuelson's (1974) conjecture that the money metric is locally concave in a neighborhood of a demand point, thereby settling an issue open for five decades; and (ii) a substantive extension of the 1988 Blackorby-Donaldson theorem that the money metric is concave in consumption only if preferences are quasihomothetic. We explain some equity implications of our local-welfare result, and as part of the rehabilitation of money metrics, suggest a case for using a second-order approximation to a money metric for local welfare. We illustrate when our results hold and don't hold with several non-standard choice models.
KW - Equity
KW - Local cost-benefit analysis
KW - Money-metric
KW - Non-ordered preferences
KW - Saddlepoint inequalities
KW - Samuelson's conjecture
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U2 - 10.1016/j.jet.2023.105717
DO - 10.1016/j.jet.2023.105717
M3 - Article
AN - SCOPUS:85169837822
SN - 0022-0531
VL - 213
JO - Journal of Economic Theory
JF - Journal of Economic Theory
M1 - 105717
ER -