Valuation Techniques for Social Cost-Benefit Analysis: - HM Treasury

5
Practical Application of
the Life Satisfaction
Approach
Although we have not gone so far as to recommend, for the immediate future, the
straightforward and automatic inclusion of new subjective well-being measures in Social Cost-
Benefit Analysis, we have made it clear that subjective well-being measurement is a live research
issue, and one which Departments should be challenged to pursue further. A number of
valuations so far generated by the life satisfaction approach are implausibly high. The most
important reasons for this are likely to have been covered in Chapter 4.
In this chapter we:
o discuss the datasets and variables that have been most commonly used in the life
satisfaction approach to valuation;
o present some recent methodological developments to the approach; and
o present ten applied econometric recommendations or guidelines, based on research so
far, that we believe should be followed when employing the life satisfaction approach,
o present a worked example of the approach.
This chapter is written in order to help Departments pursue this research agenda further.
5.1 Setting up the model
Variables
It is important to include all determinants of well-being in the model. There is no consensus on
these variables, but Dolan et al. (2008) provide a list of the main determinants of life satisfaction
found in the literature to date:
- Income
- Age
- Gender
- Marital status
- Educational status
- Employment status
- Health status
- Social relations
- Religious affiliation
- Housing and environmental conditions and crime levels in the vicinity
- Number of children and other dependents (including caring duties)
- Geographic region
- Non-market good being valued
- Personality traits (such as extroversion)
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