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Economic Theories on Kaldor-Hicks Criterion - Dictionary of Arguments

Parisi I 364
Kaldor-Hicks Criterion/Economic theories: It is reasonably clear that KH as historically constituted is not likely to remain the mainstream view. The modern view contains KH as a limiting case (Adler and Posner, 2001(1); Adler, 2003(2); Sunstein, 2001(3); Thaler and Sunstein, 2009(4); Knetsch, 1995(5); Zerbe, 2007(6)). Zerbe and Scott (2014)(7) call the new view the Expanded Kaldor–Hicks test (EKH). The new view can be reasonably characterized by the following assumptions:
1) the use of the Pareto requirement itself furnishes a justification for the use of BCA ((s) benefit-costs analysis) so that
2) the PCT test ((s) potential compensation test) can be dropped and replaced with the simple requirement that the net present value of a project be positive, where
3) the definition of benefits and losses are grounded in law and in the WTP and WTA; where
4) there is recognition that all goods for which there is a WTP are to be included in principle in any BCA analysis, so that EKH adds to KH the requirements that all ethical values for which there is a WTP ((s) willingness to pay) or WTA ((s) willigness to accept) are included in the analysis, including those concerning distributional and ethical considerations;
5) the understanding that proper use of ethical BCA is to furnish information and predictions and not to furnish the decision; and
Parisi I 365
6) that transactions cost economics rather than market failure is the basis for a justification that government intervention might be useful. The rationale for the judgment that the Pareto approach itself applies directly to a justification for EKH is found in a demonstration by Zerbe and Scott (2014)(7), showing that under reasonable and even somewhat extreme assumptions biased against their hypotheses, almost all individuals gain from the use of BCA across a portfolio of projects.
>Pareto Optimum.

1. Adler, Matthew and Eric Posner (2001). Cost–Benefit Analysis: Economic, Philosophical, And Legal Perspectives. University of Chicago Press.
2. Adler, Matthew (2008). “Risk Equity: A New Proposal.” Harvard Environmental Law Review 32.
3. Sunstein, Cass R. (2001). “Cost–Benefit Default Principles.” Michigan Law Review 99: 1651, 1663–1666.
4. Thaler, Richard and Cass Sunstein (2009). Nudge. New York: Penguin Press.
5. Knetsch, Jack L. (1995). “Assumptions, Behavior Findings, and Policy Analysis.” Journal of Policy Analysis and Management 14(1): 68–78.
6. Zerbe, Richard O. (2007). “The Legal Foundations of Cost–Benefit Analysis.” 2 Charleston Law Rev. 2: 93.
7. Zerbe, Richard O. (2014). “Welfare Economics for Law with Costly Markets,” in Richard O. Zerbe, ed., Efficiency in Law and Economics. Series editors Richard Posner and Francesco Parisi. Northampton, MA: Edward Elgar.


Richard O. Zerbe. “Cost-Benefit Analysis in Legal Decision-making.” In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University.


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Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments
The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
Economic Theories
Parisi I
Francesco Parisi (Ed)
The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017


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