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The Normative Implications of Political Decision-Making for Benefit-Cost Analysis

Published online by Cambridge University Press:  19 January 2015

Kerry Krutilla  and
Alexander Alexeev
Kerry Krutilla
Affiliation:
Indiana University, Bloomington
Alexander Alexeev
Affiliation:
Indiana University, Bloomington
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Abstract

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The Potential Pareto criterion, or Kaldor-Hicks standard, presumes that costs are not fully compensated. Yet, uncompensated costs can incentivize costly political activity and create uncertainty about political outcomes. These consequences are not reckoned in the standard benefit-cost analysis. This study models political costs and uncertainty as a function of project parameters and political-institutional characteristics. The economic consequences of political behavior are then incorporated into an adjusted project evaluation standard. This standard assures that the project’s conventionally measured net benefits are sufficient to cover political costs and uncertainty about the decision-making outcome.

Keywords

benefit cost analysispolitical coststransaction costspolitical economy
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 3 , Issue 2 , 08 May 2012 , pp. 1 - 36
Copyright
Copyright © Society for Benefit-Cost Analysis 2012

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