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Loss Aversion and Rationality in Cutback Management: A Deliberative Democratic Approach to Contingent Valuation

PFM, Vol. 12 No. 3, (2012)

Contingent valuation is a widely used and well-understood technique for the valuation of non-market resources. But under conditions of fiscal stress and budget reduction, the phenomenon of loss aversion (the tendency of otherwise rational people to place a higher value on a good they stand to lose than they did before it came into their possession) poses significant challenges to contingent valuation of public goods. This paper proposes inverting the process of contingent valuation and making it more deliberatively democratic in order to determine what citizens are “willing to sacrifice” under conditions of fiscal stress. This re-imagined form of contingent valuation offers advantages in terms of governmental transparency, analytical accuracy, and democratic legitimacy. It also allows practitioners of cutback management to incorporate important elements of political consensus building into early stages of the policy process, and it alerts them to the need and opportunity to ameliorate the impacts of spending reductions.

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