Although difficult, valuing desiderata that do not have a clear market price is important to inform public policy.
The ConCIV research group uses and further enhances the compensating income variation (CIV) method to estimate the sufficient monetary compensation needed to offset the welfare losses or gains associated with such goods.
The example of pain
A case in point is the value of not suffering from health-compromising conditions. In that case the statistical association between income, health, and well-being is used to generate an implied trade-off between income and health. In the research paper “Valuing pain using the subjective well-being method”, for example, the researchers set out to put a price on physical pain.
Chronic pain clearly lowers utility but quantifying exactly how much people are willing to trade-off pain and income is challenging. To avoid the problems of market-based valuation, stated-preference methods, and hedonic wage regressions, the researchers use the subjective well-being method to estimate the monetary value of pain relief among individuals aged 50 and older. State of the art econometric methods are applied while comparing the statistical relationship between subjective well-being and health to that of subjective well-being and income.
Because chronic pain is associated with psychological distress, functional impairment, and disability, pain-relief treatment increases well-being. In addition to other benefits, such as productivity gains, the direct effect of pain relief on quality-of-life is likely to be extensive. Monetizing this well-being improvement is thus needed when choosing treatments by their net benefit, or even when choosing between a pain treatment and other well-being-increasing policies.
Other applications
This can and is also done for other important aspects of life, such as the value of social relationships and safety from violence, one example being the research paper “Putting a price on pain: The monetary compensation needed to offset welfare losses due to violence.”
Despite methodological advantages over other willingness-to-pay methods, the CIV literature is still quite limited in its application, but this is rapidly changing.
The Consortium on Compensating Income Variation includes scholars from various countries and at various stages in their carrier, as well as institutional affiliates.
