How (In)Accurate Is Cost-Benefit Analysis? Data, Explanations, and Suggestions for Reform
In: Infrastructure Economics and Policy: International Perspectives (Cambridge, MA: Lincoln Institute of Land Policy), pp. 174, 2021
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In: Infrastructure Economics and Policy: International Perspectives (Cambridge, MA: Lincoln Institute of Land Policy), pp. 174, 2021
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In: Journal of benefit-cost analysis: JBCA, Band 12, Heft 3, S. 395-419
ISSN: 2152-2812
AbstractMost cost-benefit analyses assume that the estimates of costs and benefits are more or less accurate and unbiased. But what if, in reality, estimates are highly inaccurate and biased? Then the assumption that cost-benefit analysis is a rational way to improve resource allocation would be a fallacy. Based on the largest dataset of its kind, we test the assumption that cost and benefit estimates of public investments are accurate and unbiased. We find this is not the case with overwhelming statistical significance. We document the extent of cost overruns, benefit shortfalls, and forecasting bias in public investments. We further assess whether such inaccuracies seriously distort effective resource allocation, which is found to be the case. We explain our findings in behavioral terms and explore their policy implications. Finally, we conclude that cost-benefit analysis of public investments stands in need of reform and we outline four steps to such reform.
In: Journal of Benefit-Cost Analysis, October, pp. 1-25, doi 10.1017/bca.2021.9.
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In: JOURNAL OF MANAGEMENT INFORMATION SYSTEMS, 2022, VOL. 39, NO. 3, 607–639 https://doi.org/10.1080/07421222.2022.2096544
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