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Cost overruns and demand shortfalls – deception or selection?

Author

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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.

Suggested Citation

  • Eliasson, Jonas & Fosgerau, Mogens, 2013. "Cost overruns and demand shortfalls – deception or selection?," MPRA Paper 49744, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49744
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    File URL: https://mpra.ub.uni-muenchen.de/49744/2/MPRA_paper_49744.pdf
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    References listed on IDEAS

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    1. 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.
    2. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
    3. 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.
    4. Jean‐Pierre Benoît & Juan Dubra, 2011. "Apparent Overconfidence," Econometrica, Econometric Society, vol. 79(5), pages 1591-1625, September.
    5. 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.
    6. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    7. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    8. 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).
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    Citations

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    Cited by:

    1. Andersson , Henrik & Hultkrantz , Lars & Lindberg , Gunnar & Nilsson , Jan-Eric, 2017. "The role of economic analysis for investment priorities in Sweden’s transport sector," Working papers in Transport Economics 2017:12, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
    2. Hultkrantz, Lars & A. Krüger, Niclas & Mantalos, Panagiotis, 2014. "Risk-adjusted long-term social rates of discount for transportation infrastructure investment," Research in Transportation Economics, Elsevier, vol. 47(C), pages 70-81.
    3. Xu, Xiangdong & Chen, Anthony & Wong, S.C. & Cheng, Lin, 2015. "Selection bias in build-operate-transfer transportation project appraisals," Transportation Research Part A: Policy and Practice, Elsevier, vol. 75(C), pages 245-251.
    4. Lindsey, Robin & de Palma, André, 2014. "Cost recovery from congestion tolls with long-run uncertainty," Economics of Transportation, Elsevier, vol. 3(2), pages 119-132.
    5. Nicolaisen, Morten Skou & Næss, Petter, 2015. "Roads to nowhere: The accuracy of travel demand forecasts for do-nothing alternatives," Transport Policy, Elsevier, vol. 37(C), pages 57-63.
    6. Asplund, Disa & Eliasson, Jonas, 2016. "Does uncertainty make cost-benefit analyses pointless?," Transportation Research Part A: Policy and Practice, Elsevier, vol. 92(C), pages 195-205.
    7. Salling, Kim Bang & Leleur, Steen, 2015. "Accounting for the inaccuracies in demand forecasts and construction cost estimations in transport project evaluation," Transport Policy, Elsevier, vol. 38(C), pages 8-18.
    8. Barfod, Michael Bruhn & Salling, Kim Bang, 2015. "A new composite decision support framework for strategic and sustainable transport appraisals," Transportation Research Part A: Policy and Practice, Elsevier, vol. 72(C), pages 1-15.
    9. repec:eee:transb:v:101:y:2017:i:c:p:295-305 is not listed on IDEAS
    10. Andersson, Matts & Brundell-Freij, Karin & Eliasson, Jonas, 2016. "Validation of reference forecasts for passenger transport," Working papers in Transport Economics 2016:15, CTS - Centre for Transport Studies Stockholm (KTH and VTI), revised 07 Jul 2016.

    More about this item

    Keywords

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

    JEL classification:

    • 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

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