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Is Mandatory Project Evaluation Always Appropriate? Dynamic Inconsistencies of Irreversible and Reversible Projects

Listed author(s):
  • Kono Tatsuhito

    (Tohoku University)

  • Notoya Hiromichi

    (City of Yokohama)

Registered author(s):

    Benefit-cost analysis (BCA) is used to optimize investment in public projects. Indeed, in many countries, BCA is mandatory for provision of most public services. However, once BCA is mandated, residents can strategically alter their behaviors based on a dynamic inconsistency that the BCA-based optimal service level depends on residents’ behaviors. This paper discusses this dynamic inconsistency problem, taking transportation services as an example. We show that the problem may decrease both social welfare and the utility of residents as compared with the first-best case, and that the occurrence of second-best outcomes depends on the reversibility of the project and the general-equilibrium interdependency with another project.

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    File URL: https://www.degruyter.com/view/j/jbca.2012.3.issue-1/2152-2812.1072/2152-2812.1072.xml?format=INT
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    Article provided by De Gruyter in its journal Journal of Benefit-Cost Analysis.

    Volume (Year): 3 (2012)
    Issue (Month): 1 (January)
    Pages: 1-31

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    Handle: RePEc:bpj:jbcacn:v:3:y:2012:i:1:n:3
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    1. Boadway, R. & Marceau, N. & Marchand, M., "undated". "Investment in education and the time inconsistency of redistributive tax policy," CORE Discussion Papers RP 1219, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    4. Jerrell Richer, 1995. "Urban Congestion and Developer Precommitments: Unilateral Solutions to Dynamic Inconsistency," Urban Studies, Urban Studies Journal Limited, vol. 32(8), pages 1279-1291, August.
    5. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    6. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-633, November.
    7. Hayashi, Y. & Morisugi, H., 2000. "International comparison of background concept and methodology of transportation project appraisal," Transport Policy, Elsevier, vol. 7(1), pages 73-88, January.
    8. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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