Real-World Application of Distributional (Utility) Weighting in Benefit–Cost Analysis Using Microdata

Abstract Utility weighting in benefit–cost analysis (sometimes misleadingly referred to using the more general term “distributional weighting”) has, in almost all cases to date, been conducted with data on income ―and on costs and benefits― in income bins or at the geographic unit level, with weights computed at the bin midpoints or average income in a geographic unit. These methods have several shortcomings that cause bias: not accounting for taxes and transfers, not accounting for household composition, incorrect computation of weights, and not accounting for increasing or decreasing distribution of income or impact within bins. These shortcomings are addressed by using a recently developed method using microdata, which also allows for a wider range of applications. I apply this method to real world utility-weighting.