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

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either Dolan et al.‘s (2011b) Step Approach or Welsch‘s (2007, 2008b) methodology outlined in
section 5.2.
2. Where possible align the sample and variables with the policy question.
Whether EV or CV is the appropriate theoretical measure of value will depend on the policy
intervention and property rights. If, for example, we are interested in understanding the WTA a
loss in community centre services, where possible the sample should be focused on those
members of the population that have experienced losing a similar service. The sample used
should be similar to the target group of the policy intervention in question.
It should be noted that the effects of non-market good on life satisfaction may be
heterogeneous across the population. Therefore, when using instrumental variable techniques,
the estimator retrieves the Local Average Treatment Effect (LATE). This is the average causal
effect for the group that is affected by the instrument. In the example below (Table 2) income
was instrumented using the earnings of the spouse and so the causal effect of income on life
satisfaction is only applicable to this sample. This should be considered and discussed when
estimating values using the life satisfaction approach 3 .
3. Correctly specify the relationship between the dependent and explanatory variables in the life
satisfaction regression model
Non-parametric and semi-parametric models significantly reduce the chance of functional form
mis-specification, but at the cost of computational complexity and less desirable estimator
properties. Consideration of the regression models adopted in the existing LS applications forms
a good starting point and aids in result comparability. Goodness-of-fit tests should also be
employed in order to find the models with the best fit 4 .
4. Relative income should be controlled for.
Relative income can be controlled for by including a measure of average income for a suitable
reference group.
5. Compensatory market mechanisms should be controlled for in the model.
This will provide full, rather than partial, values of non-market goods and ‗bads‘. See the part on
partial values in section 4.2.4.
6. Counter-effects of income should be accounted for in the model.
If earned income is being used as the income variable, the number of work hours and time
spent commuting should be held constant. See the part on counter-effects of income in section
4.3.3.
7. Where multiple values may be relevant the analysis should clearly explain what the value
estimate is composed of.
3 For more details on these issues the reader is referred to Angrist and Pischke (2009) and Gangl (2010).
4 See Fox (1997) for a review of goodness-of-fit tests.