Lars Hultkrantz

Exam, Economic evaluation methods, Nov 3, 2017

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Four questions. Max 16 points. G = 8p (E = 8, D = 9-10, C = 11), VG = 12 p (B = 12-14p, A =15-16p)

1. Assessing effects
Angrist and Pischke talk about a “credibility revolution” in empirical economics.
a. What were the problems of previous standard econometric practices? How did econometrician
try to deal with these issues before the “credibility revolution”? (1p)
 Data mining (significance testing without meaning). Many plausible variables  different
theories supported by the data. No focus on causality: Issues with endogeneity, selection
bias, omitted variable bias.
 Remedies: Robustness test (and more)
b. Describe one of the methods currently used for identification and estimation of causal effects on
observational data. (2p)
 E.g. diff in diff, regression discontinuity, propensity score matching
c. What are the pros and cons (för- och nackdelar) of the method you have described if you
compare to an analysis based on a randomized controlled trial (RCT)! (1p)
 Reality vs. lab, cost, control of confounders etc.
Comments: All answers are in A&Ps article!

2. Elicitation of economic value

a. Describe a stated choice (SC, choice experiment) study: How is such a study designed and conducted?
(2p)
 Choice set, attributes, repeated questions. Focus group, testing, sampling, communication,
follow-up, statistical analys
b. How can you estimate a marginal WTP on data from such a study? (1p)
Estimate Prob (I=1) = b0 +b1dX + b2dC + e (with logit/probit regression). WTP = b1/b2 (MRS =
MU(attribute change)/MU(cost change)
d. What are the pros and cons of a SC study compared to a hedonic pricing study? (1p)
Experimental vs observational data. Hedonic: omitted var bias, multicollinearity, selection bias,
imperfect markets etc. SC: Hypo, strategic, scope/scale bias.

3. VSL and QALY

a. What is a QALY? How is it constructed and measured? (1p)
Describe both survey instrument (EQ5D3L) and methods for estimating weights (VAS, TTO, SG)
b. Define the value of a statistical life (VSL). Why is it not the value of a life of a specific individual? (1p)
WTP/dp (dp = change of probability of fatality). Ethical issues, budget constraint of an individual.
c. How can the economic value (WTP) of a QALY be computed? (1p)
From VSL (divide by expected quality adjusted years left) or direct from wtp for a specific dQALY (v =
WTP/dQALY)
e. There is as of yet no scientific consensus on how to get the “real” value of a QALY, and some
doubt that there will ever be. Explain and discuss some of the issues that may lead to such
doubts. (1p)
Are all dimensions included in EQ? Is the time-trade off plausible. Ethical issues.

4. SDR, risk and climate policy

a. Describe and explain the Ramsey equation. (1p)
b. This equation does not account for macroeconomic risk or project risk. Explain these terms! What is
the basic idea of Weitzman’s “tail-hedge” discount rate model? (1p) Here you need to explain that some
project risk cannot be diversified away since it is correlated with the macroeconomy (eg. Consumption
per capita). Also the difference between risk free rate and rate on risky investments.
c. A standard assumption in CBA is that future relative prices are constant. Why may that be misleading
in some cases? (1p) a. Supply of some resources limited (environment) b. Real wages increase 
increase of eg. VSL and value of travel time savings.
d. According to some analysts (Weitzman again, now with this “dismal theorem”) a “minimax insurance
perspective may be more relevant to climate policy decisions than a normal “expected present value”
cost-benefit analysis. Explain! (1p) If the tail of the probability distribution is fat that means that the
probability is decreasing slower than the damage cost is increasing. This means that the expected cost of
the extreme events will be very important.