The marginal social valuation of income for the UK

Abstract

Purpose - The British government takes equity issues formally into account in its appraisal of social projects and policies. However, evidence on which the measured distributional welfare weights are based is neither broad enough nor sufficiently reliable. This paper seeks to address these issues by considering a wider body of evidence. Design/methodology/approach - An important component of the welfare weight measure advocated by HM Treasury is the elasticity of marginal utility of consumption (e). A critical review of existing evidence on e is provided with a view to establishing priority areas for further research. New measures of e are presented based on revealed social values as indicated in specific government policies relating to both foreign aid and proposed income-related fines for offences. Behavioural evidence based on demand analysis using a co-integration approach is also presented. Findings - The results for e are sensitive to the estimation approach adopted. While the evidence based on a revealed social values approach including modified tax-based results suggests that e is close to unity, the measure currently used by HM Treasury, demand analysis suggests an e value close to 1.5. The evidence based on lifetime consumption behaviour is sensitive to model specification and needs updating. Originality/value - Modified tax-based findings on e are presented along with new evidence based on alternative revealed social values approaches. The new evidence from demand analysis is based on an Autoregressive Distributed Lag (ARDL) approach to co-integration. This paper will be of interest to academics specialising in welfare economics and to practitioners involved in social project appraisal. © Emerald Group Publishing Limited.