How Accurate is Benefit-Cost Analysis?
One way of assessing accuracy is by performing analyses of the same project at
different times and to compare the results. There are three temporal BCA types:
- Ex ante CBA � prior to project t= year0 T= the end of the project
- Ex post CBA � after the project t>T
- In media res CBA � during the project 0<t<T
Holding all else constant, studies performed later are usually more accurate,
because, as time goes on, there is usually less uncertainty about impacts and
therefore it is easier to determine actual NPV. But accuracy depends on how well
the nine steps of BCA are performed.
Sources of Error
Errors may arise for a number of reasons, including managers� bureaucratic lens
(organizational perspective/self-interest). There is evidence that managers
generally tend to overestimate benefits and underestimate costs. It is possible
to somewhat offset such biases with the use of an independent analyst. Most
error, however, arises from four causes:
- Omission errors�this type of errors decline over time
- Forecasting errors�these errors decrease as the impacts occur. Errors
could still be a problem with the counterfactual
- Measurement errors�these are not really affected by the passage of time
- Valuation errors�these decrease over time, but could still be present at
T
Other Types of Analysis
- Cost-effectiveness: CEA compares (mutually exclusive) alternatives on
the basis of the ratio of their costs and a single quantified but not
monetized effectiveness measure, such as dollars per lives saved.
- Cost-utility: Cost-utility analysis also relates costs to a single
benefit measure, but the benefit measure is a construct made up of several
(usually two) benefit categories, reflecting both quantity and quality. For
example, the benefit measure may be quality-adjusted life-years (QALY),
which combines both the number of additional years of life and the quality
of life during those years. Programs are compared on the basis of dollars
per quality-adjusted life-year, $/QALY. As CUA measures both quantity and
quality of impacts, it comes a step closer to CBA than CEA.
- Economic impact