The estimation of marginal utility of income for application to agricultural policy analysis

A quality-of-life index (QLI), a proxy measure of utility, is constructed by factor-weighted and simple-summation weighted aggregation of socio-psychological measures of well-being. The socio-psychological measures were constructed from quality of life domains taken from selected years of the General Social Surveys [General Social Surveys, 1972-1993: Cumulative Code Book. Principal Investigator, James A. Davis; Director and Co-Principal Investigator, Tom W. Smith - Chicago: National Opinion Research Center, 1993. (National Data Program for the Social Sciences Series, no. 13).]. The Quality of Life Indices (QLI) indices are regressed on selected socio-demographic variables using quadratic, Cobb-Douglas, square root, and semilog functional forms. QLI is much influenced by income, education, and health. As measured here, QLI is not much influenced by year of measurement, sector, or by region of residence. Much variability in the QLI is unique to individuals, and our results are suited to predict group, rather than individual well-being. Practitioners computing the benefit-cost ratio for a public program, project, or policy can weight dollars by income groups with marginal utilities derived from this study. That methodology will matter: even the 'conservative' quadratic equation indicates that the marginal utility of income (MUI) for families with very low incomes is half as large as for families with median incomes. (C) 1997 Elsevier Science B.V.