COST-BENEFIT ANALYSIS: TOO OFTEN BIASED

Cost-benefit analysis (CBA) is widely applied in many countries in evaluating public projects and regulatory instruments. It is employed, for example, as a basis for decisions within the European Union’s subsidy policy. CBA enables to express the comprehensive effect of a project or a governmental regulation on social welfare and thereby to introduce expertise to political decision-making. However, its practical applications face many problems. Different methodological choices in performing CBA enable to obtain diametrically opposite conclusions. Moreover, the way how investors apply for EU Fund subsidies encourages CBA performers to adjust CBA results to requirements of subsidy applicants. The unavoidable consequence is frequently mendacious, unreliable and misleading CBA. The paper brings an overview of the flexibility in CBA methodological choices. It further focuses on analysing the CBA performance practice in the area of CBA project appraisal for the purposes of applying for EU funding. We examine the reasons for manipulating results using a theoretical analysis and support our findings by our own empirical survey among CBA performers. As our survey among commercial CBA performers uncovers, many entities performing CBA lack expert background for CBA performance and performed CBA are often biased and misleading. Our theoretical analysis shows its main reason: The person choosing and remunerating the CBA performer for the purposes of a project appraisal for EU funding is at the same time the subsidy applicant and thus with a clear interest in the optimistic result of the CBA. CBA performers are happy to oblige their customers. The remedy to this situation is to get rid of this unintentional alliance among CBA performers and subsidy applicants.