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Is Mandatory Project Evaluation Always Appropriate? Dynamic Inconsistencies of Irreversible and Reversible Projects

Published online by Cambridge University Press:  19 January 2015

Tatsuhito Kono  and
Hiromichi Notoya
Tatsuhito Kono
Affiliation:
Tohoku University
Hiromichi Notoya
Affiliation:
City of Yokohama
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Abstract

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Benefit-cost analysis (BCA) is used to optimize investment in public projects. Indeed, in many countries, BCA is mandatory for provision of most public services. However, once BCA is mandated, residents can strategically alter their behaviors based on a dynamic inconsistency that the BCA-based optimal service level depends on residents’ behaviors. This paper discusses this dynamic inconsistency problem, taking transportation services as an example. We show that the problem may decrease both social welfare and the utility of residents as compared with the first-best case, and that the occurrence of second-best outcomes depends on the reversibility of the project and the general-equilibrium interdependency with another project.

Keywords

project evaluationdynamic inconsistencytransport servicemigration
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 3 , Issue 1 , 25 January 2012 , pp. 1 - 31
Copyright
Copyright © Society for Benefit-Cost Analysis 2012

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