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Cost overruns and demand shortfalls – deception or selection?

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  • Eliasson, Jonas
  • Fosgerau, Mogens

Abstract

A 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49744.

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Date of creation: 2013
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Handle: RePEc:pra:mprapa:49744

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Keywords: cost overruns; cost escalation; forecast accuracy; cost-benefit analysis; appraisal; selection bias; winner’s curse;

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  1. Lundberg, Mattias & Jenpanitsub, Anchalee & Pyddoke, Roger, 2011. "Cost overruns in Swedish transport projects," Working papers in Transport Economics, CTS - Centre for Transport Studies Stockholm (KTH and VTI) 2011:11, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  2. Bert van Wee, 2007. "Large infrastructure projects: a review of the quality of demand forecasts and cost estimations," Environment and Planning B: Planning and Design, Pion Ltd, London, Pion Ltd, London, vol. 34(4), pages 611-625, July.
  3. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  4. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo. 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
  5. 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, Oxford University Press, vol. 25(3), pages 344-367, Autumn.
  6. 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.
  7. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(1), pages 191-202, Winter.
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