The Endogeniety Problem in Cost-Benefit Analysis

Cost-benefit analysis, an important technique in American public sector decision-making, is used to assess policies through aggregating the estimated willingness to pay of the affected persons to enjoy the benefits or avoid the burdens of those policies. Such analyses are generally based on the implicit simplifying assumptions that both the preferences of existing persons and the genetic identities of the persons who will comprise future generations are exogenous with respect to that policy. If, however, some persons’ preferences are endogenous in that they are altered by a policy, which is often the case, then this exogenous preferences assumption will introduce error into the analysis. It is necessary for accurate policy assessment under endogenous preferences circumstances to determine whether the policy’s consequences should be valued with regard to those persons’ pre-policy implementation preferences, or instead with regard to their post-policy implementation preferences, and/or with regard to any transitional preferences. I propose in this article a framework for conducting cost-benefit analysis under endogenous preferences circumstances that addresses this concern. The problems posed for cost-benefit analysis by the implicit assumption that the genetic identities of the members of future generations are exogenous to the policy under consideration are much more serious, and that assumption can be shown to be completely untenable. Any cost-benefit analysis that purports to include policy impacts upon future generations and that rests upon this assumption will reach results and recommendations that are irrelevant to the real choices at hand. The genetic identities of the members of future generations are always endogenous, since all policies will have exponentially proliferating and eventually universal and eternal “person-altering consequences.” These important person-altering consequences should not be overlooked when conducting cost-benefit analysis. However, attempts to incorporate those consequences into the willingness to pay-based valuation methodology lead to counterintuitive and unhelpful results. The proper resolution of this endogeniety of identity problem is unclear. It may be necessary to discard cost-benefit analysis or at least supplement it with alternative assessment methodologies that are based on non-consequentialist ethical criteria