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

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

Journal of Benefit-Cost Analysis, 2012, vol. 3, issue 2, 36

Abstract: 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 analysis; political costs; transaction costs; political economy (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1515/2152-2812.1112

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