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On the impossibility of using “the correct” cost–benefit aggregation rule

Giuseppe Munda and Agata Matarazzo

Journal of Economic Studies, 2020, vol. 47, issue 5, 1119-1136

Abstract: Purpose - The purpose of this paper is to deal with one of the technical difficulties of private and social cost–benefit analysis, i.e. the choice of the proper cost–benefit aggregation rule (or method) to use, when a private capital investment decision has to be taken or a public project appraisal has to be carried out. Design/methodology/approach - Although the considerable amount of existing literature, the problem of the choice of the right mathematical aggregation rule is still an open one. The majority of authors claim that net present value is a superior method and thus it is the one to be always used. Other authors try to show that various aggregation methods, under specific conditions, arrive at the same recommendation. An exceptional case is the field of education economics where the internal rate of return is widely used. Findings - This paper offers a survey of this controversial topic which focuses on some clear cut formal properties of the various aggregation methods and considers the empirical characteristics of the different fields of application. Its main conclusion is that no “correct” aggregation rule, always applicable in all decision frameworks, can exist. Originality/value - Its main objective is to supply clear guidelines to orient practitioners and help the teaching on this topic. Its main conclusion is that no “correct” aggregation rule, always applicable in all decision frameworks, can exist. On the contrary, even if one restricts her/himself to a particular class of investments, often no clear-cut selection can be made.

Keywords: Ex-ante impact assessment; Cost-benefit analysis; Environmental capital; Human capital; Life cycle cost analysis; Net present value; Benefit-cost ratio; Internal rate of return; Payback; Multiple criteria evaluation; G11; H43; I26; O22; Q01 (search for similar items in EconPapers)
Date: 2020
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