Working papers in Transport Economics,
CTS - Centre for Transport Studies Stockholm (KTH and VTI)

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 cost is higher and demand 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.

Keywords: Cost overruns; Forecast accuracy; Cost-benefit analysis; Appraisal; Selection bias; Winner’s curse

JEL-codes: R40; R42

14 pages, June 3, 2013

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CTS2013-6.pdf  

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Published as

Jonas Eliasson and Mogens Fosgerau, (2013), 'Cost overruns and demand shortfalls: deception or selection?', Transportation Research B, vol 57, pages 105-113

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