Averting Behavior and Policy Evaluation

Information revealed by averting behavior is compared to information required for policy evaluation. Protective actions substitute for missing contingent claims markets by supporting transfers of income or health across states of nature. If the set of protective opportunities spans the state-outcome space, welfare effects are independent of preferences at the margin and otherwise are bounded by the savings in defensive expenditure, holding all contingent outcomes of pollution exposure constant. Tests for a spanning set, valuation in its absence, and implementation problems are discussed. Policy evaluations like benefits transfer are shown to require structural estimates of the protective technology.