Cost overruns and demand shortfalls – deception or selection?
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.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- Bent Flyvbjerg, 2013.
"Survival of the Unfittest: Why the Worst Infrastructure Gets Built, And What We Can Do about It,"
- 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.
- Jean‐Pierre Benoît & Juan Dubra, 2011.
Econometric Society, vol. 79(5), pages 1591-1625, 09.
- 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, vol. 34(4), pages 611-625, July.
- Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
- 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 J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- 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).
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:49744. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.