Cost overruns and demand shortfalls – deception or selection?
AbstractA number of highly cited papers by Flyvbjerg and associates have shown that ex ante infrastructure appraisals tend to be overly optimistic. Ex post evaluations indicate a bias where investment costs are higher and benefits lower on average than predicted ex ante. These authors argue that the bias must be attributed to intentional misrepresentation by project developers. This paper shows that the bias may arise simply as a selection bias, without there being any bias at all in predictions ex ante, and that such a bias is bound to arise whenever ex ante predictions are related to the decisions whether to implement projects. Using a database of projects we present examples indicating that the selection bias may be substantial. The examples also indicate that benefit-cost ratios remains a useful selection criterion even when cost and benefits are highly uncertain, gainsaying the argument that such uncertainties render cost-benefit analyses useless.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 49744.
Date of creation: 2013
Date of revision:
cost overruns; cost escalation; forecast accuracy; cost-benefit analysis; appraisal; selection bias; winner’s curse;
Other versions of this item:
- Eliasson, Jonas & Fosgerau, Mogens, 2013. "Cost overruns and demand shortfalls – Deception or selection?," Transportation Research Part B: Methodological, Elsevier, vol. 57(C), pages 105-113.
- H4 - Public Economics - - Publicly Provided Goods
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics
- R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-28 (All new papers)
- NEP-CDM-2013-09-28 (Collective Decision-Making)
- NEP-PPM-2013-09-28 (Project, Program & Portfolio Management)
- NEP-TRE-2013-09-28 (Transport Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nellthorp, J. & Mackie, P. J., 2000. "The UK Roads Review--a hedonic model of decision making," Transport Policy, Elsevier, vol. 7(2), pages 127-138, April.
- Heckman, James, 2013.
"Sample selection bias as a specification error,"
Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
- Lundberg, Mattias & Jenpanitsub, Anchalee & Pyddoke, Roger, 2011. "Cost overruns in Swedish transport projects," Working papers in Transport Economics 2011:11, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
- Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
- Bent Flyvbjerg, 2009. "Survival of the unfittest: why the worst infrastructure gets built--and what we can do about it," Oxford Review of Economic Policy, Oxford University Press, vol. 25(3), pages 344-367, Autumn.
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