Economic Foundations of Cost Effective Analysis
In order to address several controversies in the application of cost-effectiveness analysis, we investigate the principles underlying the technique and discuss the implications for the evaluation of medical interventions. Using a standard von Neumann-Morgenstern utility framework, we show how a cost-effectiveness criterion can be derived to guide resource allocation decisions. We investigate its relation to age, gender, income level, and risk aversion. Cost-effectiveness analysis can be a useful and powerful tool for resource allocation decisions, but in the presence of heterogeneous preferences and personal characteristics, a cost-effectiveness criterion that is applied at the population level is unlikely to yield pareto-optimal resource allocations.
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Copy CitationAlan M. Garber and Charles E. Phelps, "Economic Foundations of Cost Effective Analysis," NBER Working Paper 4164 (1992), https://doi.org/10.3386/w4164.
Published Versions
Journal of Health Economics, Vol. 16 (1997): 1-31.