INFORMATION AND EFFICIENCY IN COST‐BENEFIT STUDIES: A SUGGESTED PROCEDURE*
| Date | 01 February 1974 |
| DOI | http://doi.org/10.1111/j.1467-9485.1974.tb00176.x |
| Author | John B. Stephens |
| Published date | 01 February 1974 |
Scottish
Journal
of
Political
Economy
Vol.
XXI,
No.
1,
February 1974
INFORMATION AND EFFICIENCY IN
COST-BENEFIT STUDIES:
A SUGGESTED PROCEDURE*
JOHN
B.
STEPHENS
I
Cost-benefit analysis has in recent years become a widely used method
of appraising capital investment projects; its popularity stems at least in
part
from the fact that the technique provides decision makers with a
practical and systematic method
of
categorizing the relevant costs and
benefits. It is unfortunate that there is not an equally practical technique to
assist in the evaluation of these costs and benefits; this is due mainly to the
fact that evaluating costs and benefits involves makmg judgments
in
the
face of
an
uncertain future. Such methods as have been suggested
for
decision
making under uncertainty
in
the theoretical literature (for example the
discussion in Luce and Raiffa,
1967)
have not been appropriate to the
problems facing the cost-benefit analyst because these methods have been
devised for the problem of decision making where
no
information about
the future exists at any price. This is not normally the case with cost-benefit
studies; there, some information about the future, and in particular about
the likely values of the costs and benefits, may be obtained at a cost. What
is therefore proposed in
this
paper is a procedure for deciding what infonna-
tion
for the cost-benefit study is worth the cost
of
obtaining it, thus providing
an answer to problem noted by McKean (1966).l
Because the procedure suggested seeks to identify in advance those
variables upon whose more precise quantification the expenditure
of
research
effort is warranted, an economy in the
use
of
such resources should be
obtained from the beginning of the cost benefit study.
In
this respect it has
a considerable advantage over the common practice of using sensitivity
analyses after the study has
been
carried out;2 such a procedure
allows
ex
post
identification
of
the
'
key
'
variables in the study
:
the procedure
proposed here is designed to yield
ex
ante
identification.
*The author is grateful to Professor
E.
T.
Nevin, Professor
M.
I.
Artis,
Mr.
E.
J.
Cleary and Mr.
J.
T.
Harris
of
University College of Swansea, for helpful
comments on earlier drafts of this paper; special thanks must go
to
Professor
G.
L.
S.
Shackle for his help and encouragement during his
visit
to Swansea in 1972.
Other aspects of the problems of research and information
costs
are discussed
by Demetz (1966), Stigler
(1961)
and Nelson (1959).
2A
theoretical discussion may
be
found in Horowitz (1970); for an analysis of
how altering assumptions affects the rate
of
return of a project,
see
Foster and
Beesley (1963).
55
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