The Politics of Cost-Benefit Analysis

Cost-benefit analysis (CBA) is a widely used economic appraisal method that aims to support politicians in making decisions about projects and policies. Several researchers have tried to uncover the extent to which CBA actually impacts decision-making by investigating the statistical relation between the results of CBA studies and political decisions. Although these studies show that there is no significant statistical relation between the outcomes of CBA studies and political decisions, there is clear evidence that the institutionalization of CBA affects the planning and decision-making process within the bureaucracy. Civil servants, for instance, use CBAs to government projects in the early phases of the planning process. The literature identifies various barriers that hamper politicians’ use of CBA when forming their opinion. First, politicians often receive results of CBA studies too late in the process. When politicians receive a CBA after they already made up their mind and communicated their viewpoint, the chance is low that the results of the CBA will (substantially) influence their decision. A second important barrier that limits the use of CBA by politicians is that they do not have enough trust in CBA’s impartiality. A third barrier is that politicians contest value judgments implicit in CBA.

The literature distinguishes six ideological value judgments that inevitably need to be made when conducting a CBA: (a) Which individuals have standing in a CBA? (b) Which preferences have standing in a CBA? (c) Which procedure is used to value impacts? (d) On which dimensions are standard numbers differentiated? (e) Which weight is assigned to preferences of individuals in the social welfare function? (f) Which approach is adopted to select the social discount rate? The implication of the fact that CBA analysts cannot escape from making value judgments when conducing the study is that CBA is currently a problematic tool for democratic decision-making because, when applied in practice, the analysis is based on a specific set of politically loaded premises that fosters (damages) the interests of politicians (not) endorsing these premises. It is possible to overcome this problem through informing politicians about the extent to which switching value judgements leads to different CBA outcomes. The introduction of so-called normative sensitivity analyses safeguards that politicians with different belief systems are equally equipped to use the results of a CBA to arrive at a well-founded evaluation of a government project.