Equity Weights Research Articles

Asset Allocation Dynamics of Pension Funds

How does portfolio of long-term investors like pension funds change relative to the stated strategic portfolio? We investigate their portfolio dynamics using an international database that spans over 20 years and focus on portfolio rebalancing. We find that a significant proportion of the change in the weight of equity is related to passive change in portfolio due to realized equity returns. Moreover, pension funds follow asymmetric rebalancing, they rebalance poorly when stock market is doing well but rebalance strongly when stock market is doing poorly. Actual change in equity portfolio only partially reflects strategic changes. We also study cross-sectional differences in rebalancing. The results indicate that US and defined benefit pension funds rebalance less. Moreover, external managers and active managers can be identified as the major source of poor rebalancing. Lastly, between asset classes, pension fund are more passive in alternative investments.

Inequality and the Social Cost of Carbon

This paper presents a novel way to disentangle inequality aversion over time from inequality aversion between regions in the computation of the Social Cost of Carbon. Our approach nests a standard efficiency based Social Cost of Carbon estimate and an equity weighted Social Cost of Carbon estimate as special cases. We also present a methodology to incorporate more fine grained regional resolutions of income and damage distributions than typically found in integrated assessment models. Finally, we present quantitative estimates of the Social Cost of Carbon that use our disentangling of different types of inequality aversion. We use two integrated assessment models (FUND and RICE) for our numerical exercise to get more robust findings. Our results suggest that inequality considerations lead to a higher (lower) SCC values in high (low) income regions relative to an efficiency based approach, but that the effect is less strong than found in previous studies that use equity weighting. Our central estimate is that the Social Cost of Carbon increases roughly by a factor of 2.5 from a US perspective when our disentangled equity weighting approach is used.

Estimating sign-dependent societal preferences for quality of life

This paper is the first to apply prospect theory to societal health-related decision making. In particular, we allow for utility curvature, equity weighting, sign-dependence, and loss aversion in choices concerning quality of life of other people. We find substantial inequity aversion, both for gains and losses, which can be attributed to both diminishing marginal utility and differential weighting of better-off and worse-off. There are also clear framing effects, which violate expected utility. Moreover, we observe loss aversion, indicating that subjects give more weight to one group's loss than another group's gain of the same absolute magnitude. We also elicited some information on the effect of the age of the studied group. The amount of inequity aversion is to some extent influenced by the age of the considered patients. In particular, more inequity aversion is observed for gains of older people than gains of younger people.

Cost-Value Analysis and the SAVE: A Work in Progress, But an Option for Localised Decision Making?

Cost-value analysis aims to address the limitations of the quality-adjusted life-year (QALY) by incorporating the strength of public concerns for fairness in the allocation of scarce health care resources. To date, the measurement of value has focused on equity weights to reflect societal preferences for the allocation of QALY gains. Another approach is to use a non-QALY-based measure of value, such as an outcome 'equivalent to saving the life of a young person' (a SAVE). This paper assesses the feasibility and validity of using the SAVE as a measure of value for the economic evaluation of health care technologies. A web-based person trade-off (PTO) survey was designed and implemented to estimate equivalent SAVEs for outcome events associated with the progression and treatment of early-stage breast cancer. The estimated equivalent SAVEs were applied to the outputs of an existing decision analytic model for early breast cancer. The web-based PTO survey was undertaken by 1094 respondents. Validation tests showed that 68 % of eligible responses revealed consistent ordering of responses and 32 % displayed ordinal transitivity, while 37 % of respondents showing consistency and ordinal transitivity approached cardinal transitivity. Using consistent and ordinally transitive responses, the mean incremental cost per SAVE gained was £ 3.72 million. Further research is required to improve the validity of the SAVE, which may include a simpler web-based survey format or a face-to-face format to facilitate more informed responses. A validated method for estimating equivalent SAVEs is unlikely to replace the QALY as the globally preferred measure of outcome, but the SAVE may provide a useful alternative for localized decision makers with relatively small, constrained budgets-for example, in programme budgeting and marginal analysis.

PIH67 - Comparison of Equity Weights of Life Year Gains: A Discrete Choice Experiment for Japanese and Korean General Public

PIH67 - Comparison of Equity Weights of Life Year Gains: A Discrete Choice Experiment for Japanese and Korean General Public

The Marginal Damage Costs of Different Greenhouse Gases: An Application of FUND

Abstract The authors use FUND 3.9 to estimate the social cost of four greenhouse gases—carbon dioxide, methane, nitrous oxide, and sulphur hexafluoride—with sensitivity tests for carbon dioxide fertilization, terrestrial feedbacks, climate sensitivity, discounting, equity weighting, and socioeconomic and emissions assumptions. They also estimate the global damage potential for each gas—the ratio of the social cost of the non-carbon dioxide greenhouse gas to the social cost of carbon dioxide. For all gases, they find the social costs and damage potentials sensitive to alternative assumptions. The global damage potentials are compared to global warming potentials (GWPs), a key metric used to compare gases. The authors find that global damage potentials are higher than GWPs in nearly all sensitivities. This finding suggests that previous papers using GWPs may be underestimating the relative importance of reducing noncarbon dioxide greenhouse gas emissions from a climate damage perspective. Of particular interest is the sensitivity of results to carbon dioxide fertilization, which notably reduces the social cost of carbon dioxide, but only has a small effect on the other gases. As a result, the global damage potentials for methane and nitrous oxide are much higher with carbon dioxide fertilization included, and higher than many previous estimates.

Societal preferences for distributive justice in the allocation of health care resources: a latent class discrete choice experiment.

Economic theory suggests that resources should be allocated in a way that produces the greatest outputs, on the grounds that maximizing output allows for a redistribution that could benefit everyone. In health care, this is known as QALY (quality-adjusted life-year) maximization. This justification for QALY maximization may not hold, though, as it is difficult to reallocate health. Therefore, the allocation of health care should be seen as a matter of distributive justice as well as efficiency. A discrete choice experiment was undertaken to test consistency with the principles of QALY maximization and to quantify the willingness to trade life-year gains for distributive justice. An empirical ethics process was used to identify attributes that appeared relevant and ethically justified: patient age, severity (decomposed into initial quality and life expectancy), final health state, duration of benefit, and distributional concerns. Only 3% of respondents maximized QALYs with every choice, but scenarios with larger aggregate QALY gains were chosen more often and a majority of respondents maximized QALYs in a majority of their choices. However, respondents also appeared willing to prioritize smaller gains to preferred groups over larger gains to less preferred groups. Marginal analyses found a statistically significant preference for younger patients and a wider distribution of gains, as well as an aversion to patients with the shortest life expectancy or a poor final health state. These results support the existence of an equity-efficiency tradeoff and suggest that well-being could be enhanced by giving priority to programs that best satisfy societal preferences. Societal preferences could be incorporated through the use of explicit equity weights, although more research is required before such weights can be used in priority setting.

‘Economic imperialism’ in health care resource allocation – how can equity considerations be incorporated into economic evaluation?

That the maximization of quality-adjusted life years violates concerns for fairness is well known. One approach to face this issue is to elicit fairness preferences of the public empirically and to incorporate the corresponding equity weights into cost-utility analysis (CUA). It is thereby sought to encounter the objections by means of an axiological modification while leaving the value-maximizing framework of CUA intact. Based on the work of Lübbe (2005, 2009a, 2009b, 2010, forthcoming), this paper questions this strategy and scrutinizes the concomitant assumptions concerning the nature of prioritization decisions. Empirical studies indicate that these premises are in fact unwarranted. People chose a certain resource allocation because they perceive it as a fair way to treat the persons concerned, not because it maximizes something valuable, and it is questionable if prioritization decision can be represented as value-maximizing choices at all. This reflection on the fundamental distinction between deontological and consequentialist reasoning bears general implications for the scope of ‘economic imperialism.’

Estimating Sign-Dependent Societal Preferences for Quality of Life

This paper is the first to apply prospect theory to societal health-related decision making. In particular, we allow for utility curvature, equity weighting, sign-dependence, and loss aversion in choices concerning quality of life of other people. We find substantial inequity aversion, both for gains and losses, which can be attributed to both diminishing marginal utility and differential weighting of better-off and worse-off. There are also clear framing effects, which violate expected utility. Moreover, we observe loss aversion, indicating that respondents give more weight to one group’s loss than another group’s gain of the same absolute magnitude. We also elicited some information on the effect of the age of the studied group. The amount of inequity aversion is to some extent influenced by the age of the considered patients. In particular, more inequity aversion is observed for gains of older people than gains of younger people.

Planning of road construction projects with a view to stimulating economic growth and development

This paper provides an outline of how the economic evaluation and selection of road construction projects can be complemented by social evaluation with a view to achieving a more equitable welfare distribution within a developing country. The article commences by elaborating on the general economic benefits that can arise from investment in economically justified road infrastructure. The different classes of non-road-user beneficiaries are idenified and discussed. The operational characteristics of road transport that are conducive to the stimulation of economic activity are identified and described. The present inequality of income distribution in South Africa is dealt with briefly, followed by a discussion and analysis on the use of equity weights in project evaluation to help bring about a more equitable welfare distribution

Inquiry into the Relationship between Equity Weights and the Value of the QALY

BackgroundA commonly held view of the decision rule in economic evaluations in health care is that the final incremental cost-effectiveness ratio needs to be judged against some threshold, which is equal for all quality-adjusted life-year (QALY) gains. This reflects the assumption that “a QALY is a QALY” no matter who receives it, or the equity notion that all QALY gains are equally valuable, regardless of the context in which they are realized. If such an assumption does not adequately reflect the distributional concerns in society, however, different thresholds could be used for different QALY gains, whose relative values can be seen as “equity weights.” AimOur aim was to explore the relationship between equity or distributional concerns and the social value of QALYs within the health economics literature. In light of the empirical interest in equity-related concerns as well as the nature and height of the incremental cost-effectiveness ratio threshold, this study investigates the “common ground” between the two streams of literature and considers how the empirical literature estimating the incremental cost-effectiveness ratio threshold treats existing distributional considerations.

The social cost of carbon in U.S. regulatory impact analyses: an introduction and critique

In 2010, as part of a rulemaking on efficiency standards, the U.S. government published its first estimates of the benefits of reducing CO2 emissions, referred to as the social cost of carbon (SCC). Using three climate economic models, an interagency task force concluded that regulatory impact analyses should use a central value of \$21 per metric ton of CO2 for the monetized benefits of emission reductions. In addition, it suggested that sensitivity analysis be carried out with values of \$5, \$35, and \$65. These estimates have been criticized for relying upon discount rates that are considered too high for intergenerational cost–benefit analysis, and for treating monetized damages equivalently between regions, without regard to income levels. We reestimate the values from the models (1) using a range of discount rates and methodologies considered more appropriate for the very long time horizons associated with climate change and (2) using a methodology that assigns “equity weights” to damages based upon relative income levels between regions—i.e., a dollar’s worth of damages occurring in a poor region is given more weight than one occurring in a wealthy region. Under our alternative discount rate specifications, we find an SCC 2.6 to over 12 times larger than the Working Group’s central estimate of \$21; results are similar when the government’s estimates are equity weighted. Our results suggest that regulatory impact analyses that use the government’s limited range of SCC estimates will significantly understate potential benefits of climate mitigation. This has important implications with respect to greenhouse gas standards, in which debates over their stringency focus critically on the benefits of regulations justifying the industry compliance costs.

EFFICIENCY AND EQUITY: A STATED PREFERENCE APPROACH

Outcome measurement in the economic evaluation of health care considers outcomes independent of to whom they accrue. This article reports on a discrete choice experiment designed to elicit population preferences regarding the allocation of health gain between hypothetical groups of potential patients. A random-effects probit model is estimated, and a technique for converting these results into equity weights for use in economic evaluation is adopted. On average, the modelling predicts a relatively high social value on health gains accruing to nonsmokers, carers, those with a low income and those with an expected age of death less than 45 years. Respondents tend to favour individuals with similar characteristics to themselves. These results challenge the conventional practice of assuming constant equity weighting. For decision makers, whether a formal equity weighting system represents an improvement on more informal approaches to weighing up equity and efficiency concerns remains uncertain.

CAN COST-EFFECTIVENESS ANALYSIS INTEGRATE CONCERNS FOR EQUITY? SYSTEMATIC REVIEW

The aim of this study was to promote approaches to health technology assessment (HTA) that are both evidence-based and values-based. We conducted a systematic review of published studies describing formal methods to consider equity in the context of cost-effectiveness analysis (CEA). Candidate studies were identified through an unrestricted search of the Pub Med and EMBASE databases. The search closed on January 20, 2011. We identified additional studies by consulting experts and checking article bibliographies. Two authors independently reviewed each candidate study to determine inclusion and extracted data from studies retained for review. In addition to documenting methods, data extraction identified implicit and explicit notions of fairness. Data were synthesized in narrative form. Study quality was not assessed. Of the 695 candidate articles, 51 were retained for review. We identified three broad methods to facilitate quantitative consideration of equity concerns in economic evaluation: integration of distributional concerns through equity weights and social welfare functions, exploration of the opportunity costs of alternative policy options through mathematical programming, and multi-criteria decision analysis. Several viable techniques to integrate equity concerns within CEA now exist, ranging from descriptive approaches to the quantitative methods studied in this review. Two obstacles at the normative level have impeded their use in decision making to date: the multiplicity of concepts and values discussed under the rubric of equity, and the lack of a widely accepted normative source on which to ground controversial value choices. Clarification of equity concepts and attention to procedural fairness may strengthen use of these techniques in HTA decision making.

Priority setting in health care and higher order degree change in risk

This paper examines how priority setting in health care expenditures is influenced by the presence of uncertainty about the severity of the illness and the effectiveness of medical treatment. We provide necessary and sufficient conditions on social preferences under which a social planner will allocate more health care resources to populations at higher risk. Changes in risk are defined by the concept of stochastic dominance up to order n. The shape of the social utility function and an equity weighting function are used to model the inequality aversion of the social planner. We show that for higher order risk changes, the usual conditions on preferences such as prudence or relative risk aversion are not necessarily required to prioritise health care when there are different levels of uncertainty associated with otherwise similar patient groups.

The Time Evolution of the Social Cost of Carbon: An Application of Fund

The authors estimate the growth rate of the social cost of carbon. This is an indication of the optimal rate of acceleration of greenhouse gas emission reduction policy over time. The authors find that the social cost of carbon increases by 1.3% to 3.9% per year, with a central estimate of 2.2%. Previous studies found an average rate of 2.3% and a range of 0.9 to 4.1%. The rate of increase of the social carbon depends on a range of factors, including the pure rate of time preference, the rate of risk aversion, equity weighting, the socioeconomic and emission scenarios, the climate sensitivity, dynamic vulnerability, and the curvature of the impact functions. Paper submitted to the special issue The Social Cost of Carbon

Regional and Sectoral Estimates of the Social Cost of Carbon: An Application of Fund

The social cost of carbon is an estimate of the benefit of reducing CO2 emissions by one ton today. As such it is a key input into cost-benefit analysis of climate policy and regulation. We provide a set of new estimates of the social cost of carbon from the integrated assessment model FUND 3.5 and present a regional and sectoral decomposition of our new estimate. China, Western Europe and the United States have the highest share of harmful impacts, with the precise order depending on the discount rate. The most important sectors in terms of impacts are agriculture and increased energy use for cooling. We present an extensive sensitivity analysis with respect to the discount rate, equity weights, different socio economic scenarios and values for the climate sensitivity parameter.

Applying the ecosystem services concept to poverty alleviation: the need to disaggregate human well-being

SUMMARYThe concept of ecosystem services (ES), the benefits humans derive from ecosystems, is increasingly applied to environmental conservation, human well-being and poverty alleviation, and to inform the development of interventions. Payments for ecosystem services (PES) implicitly recognize the unequal distribution of the costs and benefits of maintaining ES, through monetary compensation from ‘winners’ to ‘losers’. Some research into PES has examined how such schemes affect poverty, while other literature addresses trade-offs between different ES. However, much evolving ES literature adopts an aggregated perspective of humans and their well-being, which can disregard critical issues for poverty alleviation. This paper identifies four issues with examples from coastal ES in developing countries. First, different groups derive well-being benefits from different ES, creating winners and losers as ES, change. Second, dynamic mechanisms of access determine who can benefit. Third, individuals' contexts and needs determine how ES contribute to well-being. Fourth, aggregated analyses may neglect crucial poverty alleviation mechanisms such as cash-based livelihoods. To inform the development of ES interventions that contribute to poverty alleviation, disaggregated analysis is needed that focuses on who derives which benefits from ecosystems, and how such benefits contribute to the well-being of the poor. These issues present challenges in data availability and selection of how and at which scales to disaggregate. Disaggregation can be applied spatially, but should also include social groupings, such as gender, age and ethnicity, and is most important where inequality is greatest. Existing tools, such as stakeholder analysis and equity weights, can improve the relevance of ES research to poverty alleviation.

Situational determinants of reward allocation: The equity–equality equilibrium model

We conducted a vignette survey to investigate the effects of situational factors—such as a group’s size, the amount of status differentiation among its members, and the type of task on which they work—on respondents’ reports of the “fair allocation” of resources to members of status-heterogeneous task groups. We argue that to the degree that situational factors make productivity, status and competence more relevant, allocators will increase the weight of equity compared to equality, and to the degree that they make the maintenance of positive relations among members relevant, allocators will decrease the weight of equity compared to equality. Each vignette described members of a status-unequal work group with three, four, or five members. We use status characteristics theory to calculate status inequality for each group. Groups’ tasks were described as either regular or temporary, requiring either interdependent or independent relations between coworkers, and involving routine or nonroutine working conditions. Participants from the United States and from Turkey read a series of vignettes and for each wrote what they thought was the fairest salary for each group member. Using reward expectations theory, our balance model and reported allocations, we estimate empirically the weight of equity for respondents and vignettes. All of the situational factors we identify do affect the equity–equality balance, though some only in interactions. We demonstrate that our balance model of distributive justice provides a useful instrument to capture these effects.

QALYs und Gerechtigkeit: Ansätze und Probleme einer gesundheitsökonomischen Lösung der Fairnessproblematik

Empirical studies have shown that QALY-maximization leads to results that are perceived as unfair. Health economists have attempted to integrate fairness aspects in Cost-Utility Analysis by means of equity weighting. A well-known example is Cost-Value Analysis (Nord et al.). Over and above the value of individual health related utilities, it tries to capture the value of distributing resources fairly. The debate has shown, however, that these approaches face several problems. The present contribution argues that the difficulties are of a more fundamental nature than most contributors to the debate have hitherto assumed. Cost-utility analysis, we believe, cannot consistently be adjusted to meet fairness objections by means of weighting schemes.