Scandinavian Working Papers in Economics

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

No 2016:8: Does uncertainty make cost-benefit analyses pointless?

Disa Thureson () and Jonas Eliasson ()
Additional contact information
Disa Thureson: VTI, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden
Jonas Eliasson: KTH, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden

Abstract: Cost-benefit analysis (CBA) is widely used in public decision making on infrastructure investments. However, the demand forecasts, cost estimates, benefit valuations and effect assessments that are conducted as part of CBAs are all subject to various degrees of uncertainty. The question is to what extent CBAs, given such uncertainties, are still useful as a way to prioritize between infrastructure investments, or put differently, how robust the policy conclusions of CBA are with respect to uncertainties. Using simulations based on real data on national infrastructure plans in Sweden and Norway, we study how investment selection and total realized benefits change when decisions are based on CBA assessments subject to several different types of uncertainty. Our results indicate that realized benefits and investment selection are surprisingly insensitive to all studied types of uncertainty, even for high levels of uncertainty. The two types of uncertainty that affect results the most are uncertainties about investment cost and transport demand. Reducing uncertainty can still be worthwhile, however, because of the huge amounts of money at stake: a 10% reduction in general uncertainty can increase the realized benefits of a national infrastructure investment plan by nearly 100 million euro (assuming that decisions are based on the CBAs). We conclude that, despite the many types of uncertainties, CBA is able to fairly consistently separate the wheat from the chaff and hence contribute to substantially improved infrastructure decisions.

Keywords: Cost-benefit analysis; Infrastructure investments; Uncertainty; Robustness

JEL-codes: R42; R48

18 pages, March 15, 2016

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Published as
Disa Asplund and Jonas Eliasson, (2016), 'Does uncertainty make cost-benefit analyses pointless?', Transportation Research A, vol 92, pages 195-205

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