Current estimates of regulatory benefits are too low and possibly far too low. This is because the standard economic approach to measuring costs and benefits, which attempts to estimate people's willingness to pay for various regulatory benefits, ignores a central point about valuation, thus producing numbers that systematically understate those benefits. Conventional estimates tell us the amount of income an individual, acting in isolation, would be willing to sacrifice in return for, say, an increase in safety on the job. But while these estimates are based on the implicit assumption that economic well-being depends only on absolute income, considerable evidence suggests that relative income is also an important factor. When an individual buys additional safety in isolation, he experiences not only an absolute decline in the amounts of other goods and services he can buy, but also a decline in his relative living standards. In contrast, when a regulation requires all workers to purchase additional safety, each worker gives up the same amount of other goods, so no worker experiences a decline in relative living standards. If relative living standards matter, an individual will value an across the board increase in safety more highly than an increase in safety that he alone purchases. Where the government currently pegs the value of a statistical life at about $4 million, it ought to employ a value between $4.7 million and $7 million. A conservative reading of the evidence is that when government agencies are unsure how to value regulatory benefits along a reasonable range, they should make choices toward or at the upper end.
Frank, Robert H. and Sunstein, Cass R.
"Cost-Benefit Analysis and Relative Position,"
University of Chicago Law Review: Vol. 68
, Article 1.
Available at: http://chicagounbound.uchicago.edu/uclrev/vol68/iss2/1