Shadow prices

This project aims to measure and estimate the value of different capital assets and build a rigorous framework for classifying missing capitals.

Measuring wealth is crucial to get a better idea about the state and progress of an economy. Many people are familiar with Gross Domestic Product (GDP) a commonly used economic measure of national output. However, welfare economists are increasingly pointing towards a group of neglected “missing capitals” that are important for assessing the growth of an economy, sustainability and evaluating changes in economic welfare.

Missing capitals that contribute to the economic welfare of a country might include non-market assets such as a beautiful landscape. Others are assets with exchange prices but associated with other non-market types of value that mean there is a gap between the exchange price and the social value (for example, woodlands, freshwater, farmlands and coasts).

Accounting (or shadow) prices are an important tool that allow us to measure an asset’s social value in ways that simple exchange prices cannot. Exchange prices tell us the monetary value of assets and are observable. However, accounting prices can be positive or negative and not observable, therefore making them more challenging to estimate. This reflects the net contribution of each asset to social welfare. Therefore, accounting prices have potential to reflect a broader measure of economic welfare.

Development of a full suite of comprehensive wealth metrics requires methods and estimates of accounting prices, including for assets with no market prices or for which externalities imply a wedge between market prices and social cost. There are large literatures in environmental and cultural economics using various estimation methods (revealed preference, stated preference, hedonic estimation, benefit transfer) and similar approaches have begun to be applied in the case of digital assets.

However, there are limitations in this literature to date, which the project seeks to address. There are theoretical and applied aspects. Much of the environmental and cultural literatures use the approach of ‘Total Economic Value’ (TEV) which is theoretically inconsistent with the economic production function approach of inclusive wealth; for example, there is no constraint on the aggregated value of stated preference estimates. The aim is to develop an extended version of Dasgupta (2021) incorporating a wide suite of assets and to identify the most appropriate and feasible methods for estimation of accounting prices for different categories of asset and taking into consideration an appropriate ‘budget constraint’.

The research will then apply this expanded approach with a range of estimation methods, including a range of stated preference methods (WTA, DCE etc), data science/ML methods of estimation, and time use approaches, with a view to triangulating among them and determining the most appropriate for different categories. It will identify the challenges of aggregation from the microeconomic and local estimates found in the literature, including by comparison of adding of ‘bottom up’ estimates and ‘top down’ regional or national estimates.

The project will help the ONS (Office for National Statistics) develop an approach to accounting prices as part of its work on the missing capitals and a systematic and rigorous framework for the momentum to go ‘Beyond GDP’ in economic statistics.

The framework will also help to pilot new approaches and empirical applications to estimate missing capital accounting prices. Most importantly, it will enable new insights into measuring and estimating social value for use in social welfare evaluations. Ultimately, this will help develop better measures of human welfare and wellbeing and be of wide interest to academic, practitioner and policy communities.

Coyle, D. and Wdowin, J. ‘Accounting for missing capitals: approaches to valuation’ Contributed Session E: Inclusive wealth/beyond GDP. ESCoE Conference on Economic Measurement, King’s College London, 21-23 May 2025

Coyle, D. and Wdowin, J. ‘Accounting for missing capitals: Approaches to valuation’ ESCoE Discussion Paper Series, ESCoE DP 2025-05, 19 May 2025

Wdowin, J. ‘Accounting for missing capitals: Approaches to valuation‘ ESCoE Blog, 19 May 2025

Coyle, D. ‘The metrics that really matter: How can we better measure economic and societal change?’ Book launch for ‘The Measure of Progress, by Diane Coyle’ Resolution Foundation, 3 April 2025

Coyle, D. ‘The Measure  of Progress: Counting What Matters’ Stanford Digital Economy Lab Seminar Series, 13 March 2025

Coyle, D. ‘The Measure  of Progress: Counting What Matters’ keynote at New Measures of the Economy Workshop, Stanford University, 13 March 2025

Wdowin, J. ‘A capability approach to measuring relative inequality in individual environmental welfare’ Contributed session C: Inequality and life satisfaction. ESCoE Conference on Economic Measurement, Alliance Business School, University of Manchester 15-17 May 2024

Wdowin, J. ‘Measuring and estimating shadow prices’ ESCoE Blog, 8 April 2024

Coyle, D. ‘Measurement of non-market goods’ New Measures of the Economy Workshop, The Digital Economy Lab, Stanford University, 19 March 2024