Benefit Transfer via Preference Calibration: “Prudential Algebra” for Policy

V. Kerry Smith, George Van Houtven and Subhrendu K. Pattanayak


This paper proposes a new approach to benefit transfer. The method assumes a specific form for preferences and uses available benefit information to identify and calibrate the preference parameters to match the existing benefit estimates. This approach assures economic consistency of the transfers. Benefit measures can never be inconsistent with household income. The logic also offers a series of potentially observable “predictions” that can be used to gauge the plausibility of benefit transfers. When multiple benefit estimates from different methods are available such as hedonic property value, travel cost demand, and contingent valuation, the framework uses the definition of the benefit concept from each method in a single preference function to reconcile differences. It provides a specific way to take account of baseline conditions and scope effects (i.e., the size of the proposed change) consistently in the transfer. The method is illustrated using estimates for benefit measure changes in water quality from three studies: travel cost demand, hedonic property value, and contingent valuation analysis. (JEL Q26)