Ekonomika a management

COST-BENEFIT ANALYSIS:
TOO OFTEN BIASED
Elika Vejchodsk

Introduction the transparency of regulation and diminish the

In current political practice in many countries, influence of lobby groups, as discussed e.g.
cost-benefit analysis (CBA) is applied in in [4]. Politicians decisions are not random:
evaluating public projects and regulatory political action is supported by CBA results [1].
instruments. In evaluation using CBA, the In the USA since Reagans era the
effort is to express the comprehensive effect requirement to decide based on CBA in
of a project or a governmental regulation on regulatory impact analyses (RIA) was anchored
social welfare. Social welfare can be affected in the legislation by Executive Order 12291 in
by changing environmental quality, improving 1981. All the governmental agencies, including
quality of life due to better healthcare, etc. Since EPA, employ CBA in their decision-making
many projects essentially affect environmental [1]. The basic requirement for a monetary
quality either positively or adversely, the effect expression of monetarily quantifiable effects,
of non-monetary costs and benefits derived therefore the application of CBA in RIA,
from changing environmental quality is often remains preserved till now in the USA (partial
involved in CBA in addition to financial costs amendments by Clintons Executive Order
and benefits. CBA is therefore an evaluation 12866 in 1993 and Obamas Executive Order
method widely discussed in neoclassical 13536 in 2011). CBA is also in abundant use
environmental economics, e.g. [13], [12]. in the EU political decision-making, although
What has enabled CBA to become one of the RIA analyses across European countries
most widespread methods in political decision- vary in their methodologies used for impact
making? Dryzek [6] offers an explanation in his assessment. The only country long insisting on
environmental discoursive analysis. According CBA for RIA analyses has been the UK [23].
to him, methods such as CBA, risk analysis In major European countries including France,
and EIA (environmental impact assessment) Germany, Spain or Italy, RIA does not contain
have penetrated political practice due to the a robust economic appraisal [5]. CBA has
overwhelming conviction that decision-making been largely used in EU countries as a basis
on political issues should be left to experts. That for decisions concerning allocation of subsidies
is why he believes expert agencies such as the from Structural Funds and the Cohesion Fund.
US EPA (Environmental Protection Agency) and Although neoclassical economists agree on
the United Nations Environment Programme the meaningfulness of using CBA in decision-
have come into existence. CBA introduces this making, they subject parts of its methodology
expertise to political decision-making. From to scholarly reflection. CBA as a method
the point of view of neoclassical economics, within neoclassical economics has therefore
CBA is capable of answering the question been evolving in some aspects. Its real-world
whether a policy project or regulatory tool is applications make use of different procedures
beneficial or detrimental to society. According based on different arguments. Due to the
to neoclassical environmental economics, disunited methodology employed in practical
therefore, politicians should subject their crucial CBA execution, the results of studies may be
decisions influencing environmental quality to misleading. Two different studies of the same
CBA. CBA advocates also see its application as thing based on different methodologies may
a way to improve the efficiency of control over arrive at fundamentally different conclusions.
the meaningfulness of political action, increase CBA results may also be deliberately distorted

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by adjusting the method chosen to the required resources based on these preferences [12].
outcome. However, practical CBA may also In CBA, these preferences are then reflected
involve other problems such as the degree of in the monetary valuation of environmental
expertise of its performers (methodological goods and services as well as other non-
problems of CBA for the Dutch case discussed traded goods. The value of environmental
in [20]). goods and services expresses an individuals
This paper outlines the methodological willingness to pay for an improvement or
disagreements in the performance of CBA. a change to the quantity of the environmental
It further focuses on issues of practical CBA goods and services, or willingness to accept
applications from the point of view of impartiality monetary compensation for deterioration of
of CBA performers. We bring a criticism of the environmental goods and services. The
the current setting of CBA execution. As an total social value of a certain natural resource
example, we use CBA performed for the is then the sum of the subjective individual
purposes of applying for EU funding from values attributed to it by the individuals within
Structural Funds in the Czech Republic. Our the society [16]. Environmental economics has
theoretical analysis shows that with the current developed a number of special methods in
setting of rules for the CBA performance for order to seek for environmental value (for more
the purposes of EU funding, its performers on environmental valuation methods, see, e.g.
cannot be expected to show expertise and [9], [13], [30], [19]).
impartiality. We support the theoretical analysis The purpose of CBA is to decide on the
results with data from our own empirical survey worthiness of a public investment or regulation
among commercial CBA performers who offer (e.g. investment in a wastewater treatment
consulting in the area of EU Structural Funds. plant) based on quantitatively expressed
There is no reason to believe that the Czech benefits and costs. Thus it seeks to bring
Republic is a mere exception in this sense and the nature of the public sector decision-
that CBA performance works any better in other making closer to the situation common in the
countries. private sector. A company will also weigh the
The first section of the paper outlines costs and benefits of its business plans. The
the theoretical basis of CBA grounded in recoverability of public funds is viewed in CBA
neoclassical economics. The next section in connection with balancing social benefits
presents critical arguments voiced from the and costs. If a public investment brings no
neoclassical economic school. This discussion financial gains yet we maintain that it is socially
is followed by a section dealing with the issues beneficial, it has to bring other benefits than
of practical CBA application on the example of financial, such as environmental improvement
the Czech Republic. The final section of the and, through it, welfare increase of its users.
paper presents suggestions for resolving the When assessing the suitability of public
current unsatisfactory situation. plans from this point of view, a plan whose
total benefits discounted to the present value
1. Theoretical Grounding of CBA outweigh its total discounted costs is justifiable.
CBA is based in neoclassical economics, In the case of the wastewater treatment plant,
currently the mainstream of economic theory. CBA will balance the social benefits, which may
Since CBA is widely applied in environmental be benefits derived from reduced watercourse
protection, we shall make the introduction to its pollution, against the social costs, which may
theoretical grounding using environmental CBA be the capital investment and operating costs
as an example. The introduction to neoclassical of the treatment plant and the adverse impact
environmental economics may be found e.g. of the treatment plant on the local environment
in [26]. CBA rests upon an anthropocentric (odour near the plant, affecting the quality
valuation of the environment, that is, the humans of housing, for example). The mainstream
subjective valuation based on their individual CBA methodology (not every CBA advocate
preferences. Neoclassical economics is based identifies with the mainstream CBA method,
on consumer sovereignty, sees consumer as we will see below) is based on the Kaldor-
preferences as exogenous and respects any Hicks compensation criterion. This criterion
subjective consumer opinion. The question an tests the possibility of those who have benefited
economist solves is the optimum allocation of from the project compensating for those who

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have suffered a loss from it. According to this the poor. The votes would weigh equally only
criterion, the public sector plan in question is under the condition of the equal distribution
welfare increasing if, after its execution, goods of wealth in society [13]. The CBA outcome is
can theoretically be redistributed so that the therefore dependent on the wealth distribution
situation after the redistribution of these goods in society and will more likely unfold from the
is a Pareto improvement to the no-project desires of the relatively richer social classes.
situation [1]. According to Adler and Posner [1], however,
It follows from the above that the result it is correct that CBA does not consider the
of CBA describes the effective demand for distribution of wealth. They believe that
a public plan [13]. Not only does it show every economists dealing with economic efficiency
persons voting on the matter but it can also and changes in total welfare have nothing to say
discover the degree of their preference. The on the wealth distribution in society. According
different voices for and against do not weigh to them, the wealth distribution in society is
the same in CBA. They are weighted according a purely political issue. If a government wishes
to the degree of preference, expressed here as to redistribute wealth, Adler and Posner [1,
the degree of willingness to pay or willingness p. 186] consider that a more cost-effective way
to accept compensation. is through taxes and transfers rather than by
building dams in poor areas or toxic waste
2. Methodological Disunities of CBA dumps in rich areas. Among others, also Frank
Although the CBA method is highly elaborated [8] mentions tax progression as a solution to the
and widely recognised, there is no agreement problems of the poor. On the other hand, some
in opinion among economists concerning its economists see an opportunity to include equity
methodology. We shall focus on a discussion of issues directly in CBA by means of explicit
the normative issues of equity, (re)distribution distribution weights of votes. However, that
of wealth in society and mutual equality of would imply weighting individuals willingness
people (discussion of other issues e.g. in [29], to pay based on the individuals marginal utility
[7]). Gramlich [10] deals with the distribution of money. The discussion of distribution weight
issues connected with CBA in detail. He points of votes is summed up in [1].
out that two different projects one bringing net Sen [25] in his reflection of CBA focuses
benefit to the poor, the other bringing the same on methods for valuating public goods;
net benefit per dollar invested to the rich are defining them in accordance with Samuelsons
equal from the CBA point of view. According approach as non-rival goods that cannot be
to the CBA result, it does not matter which of excluded from consumption (for the summary of
the projects is chosen. Still, the society may other Sens comments to CBA, see [15]) . They
prefer a more desirable redistribution of wealth, are evaluated in the same way as if they were
normatively towards the poor. Mainstream CBA private goods: individuals willingness to pay for
is nothing more and nothing less than a Kaldor- the provision of these goods is sought just as if
Hicks compensation test. Since no actual the individuals were capable of paying for the
compensations are made in reality (actual goods individually, without the help of others.
compensations are not technical feasible due Sen [25] quotes the Exxon Valdez disaster as
to enormous transaction costs), the project may an example. In ordinary contingent valuation,
result in a shift of wealth from the poor towards the researcher asks how much you would be
the rich, thus exacerbating inequalities in willing to pay to restore the environment to the
society. Even a project that brings an additional state prior to the disaster. Say your reply as
effect to the wealthiest social class to which a respondents is 20 dollars. However, that is
the entire society contributes may increase the an irrelevant scenario according to Sen. One
social welfare according to CBA. CBA does not cannot pay 20 dollars and believe that the
examine who suffers a loss from a project (the disaster consequences will be removed thanks
poor or the rich) and who earns from it. to ones payment. The personal sacrifice of
Moreover, as stated by Hanley and Spash the payment to which contingent valuation is
[13], the relatively richer have a relatively bound changes very little in providing the good;
stronger vote in CBA than the relatively poorer. the payment itself changes virtually nothing in
Their willingness to pay or accept compensation a disaster of the Exxon Valdez dimensions.
will be higher in absolute terms than those of Sen compares an individuals decision-making

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concerning the purchase of a private good to exponential as well as hyperbolic discounting).
that concerning the individuals contribution to A valuable overview of the discussion of
environmental protection. Whereas you are different concepts of social discount rent may
unaffected by other peoples willingness to pay be found in [14].
when buying a private good, such as a tube of There is a fairly wide range of opinions
toothpaste, you tend to be strongly influenced on the correct CBA procedure among its
by whether and how much others are willing to advocates. Some insist on the application of the
pay when deciding about your contribution to classic mainstream CBA based on the Kaldor-
environmental protection. Sen [25] highlights Hicks compensation criterion, exponential
the need for a common effort to provide discounting, etc. Others tend towards the
a public good. Instead of the usual valuation accurate application of a less commonly used
based on a market analogy, Sen believes the CBA method, such as the use of hyperbolic
method should employ the social choice model, discounting and distribution weights of votes.
formulated by Arrow [3]. His idea is to confront Yet others refuse mechanistic adoption of the
respondents with realistic alternative solutions, CBA methodology from textbooks and call for
including the explicit statement of possible a certain flexibility. As stated by Adler and Posner
responses by other members of society. [1], who defend the need for flexibility in drafting
CBA advocates have been intensely CBA techniques for specific applications,
discussing the discounting method and discount practical executions of CBA have to provide
rate used in CBA, e.g in [2]. Exponential room for deontological ethics, for instance. This
discounting, working with a constant discount means that CBA recommendations may in no
rate, is the norm. As summarized in [8], case violate some ethical rules: theft must not
exponential discounting does not match be recommended even if its social benefits
peoples decision-making patterns. Hyperbolic outweigh its costs. They also say that CBA
discounting, in other words a gradual reduction analyses should always respect the specific
in the discount rate over time, would be a closer distribution of wealth in a society.
representation. Faced by the decision to accept The pliability of the CBA method is related
100 dollars today or 105 dollars in a week to one of the fundamental questions of its
versus 100 dollars in a year or 105 dollars in application. The possibility of choosing the
a year and a week, most people will choose 100 CBA method results in a situation in which one
dollars today in the former case and 105 dollars CBA performer proves the net social benefit
in a year and a week in the latter. In the latter of a measure while another disproves it.
case, deciding about an event that will occur A famous recent example is the debate of the
a year from now, the perceived time value of appropriateness of investing in prevention of
money does not decrease as fast over a week global climate change. According to Stern [27],
as in the former case. One prefers to wait for an investing in preventive measures in climate
extra week to get a larger amount of money. This change pays off very well to society. Nordhaus
should correspond to a decreasing discount [21] refutes Sterns result. In his view, Sterns
rate over time. Assuming a constant discount analysis only arrives at that conclusion due to
factor, the decisions should be identical: either its use of a very low discount rate which was in
the person should choose 100 dollars in both Sterns analysis derived from a very low pure
cases or 105 dollars in both cases, depending rate of social time preference and a specific
utility function.
on the individuals discount rate [8]. The height
of the discount rate is another aspect thoroughly
discussed among economists. It may vary 3. Questions Concerning Practical
considerably from a rate close to zero to Application of CBA in a Czech
20%. Also for these extreme discount rates Republic Example
a justification may be found as summarized in Currently, the Czech Republic sees a wide
[22]. Some economists prefer to use a discount application of CBA although there is no legal
rate based on the opportunity cost of capital obligation for governmental agencies to employ
(higher rates of exponential discounting), some CBA in their decision-making. There has
prefer to derive the discount rate from the pure admittedly been an obligation for the supreme
rate of social time preference which discounts state administration bodies to apply RIA when
welfare of future generations (lower rates of deciding about the establishment and form of

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any generally binding legal regulation in the CBA results are therefore relatively easy to
Czech Republic since 2007. The Czech legal manipulate. The opportunity for influencing
system does not impose any obligation to use CBA results is supported by the fact that few
a specific qualitative or quantitative analysis, people understand its methodology. Reviewing
such as CBA, as part of RIA. The choice is the correctness of CBA procedures is thus
therefore up to the RIA performer (Government made difficult.
Resolution no 922/2011 Coll.). A large number In the Czech Republic, the CBA performer
of CBA are currently made chiefly for the bears no liability for its potential incorrectness.
purposes of obtaining subsidies from EU Funds. Anyone may offer CBA performance. No
Applicants have frequently been required to licence whatsoever is required that could be
elaborate CBA under the EU Structural Fund suspended or revoked if deficiencies are found
programming period 20072013 (see subsidy in elaborated CBA, as is the case with the
conditions of operational programmes and driving licence if you fail to comply with set rules.
regional operational programmes of the Czech This, however, leads to a concern about the
Republic). For an applicant to obtain a subsidy impartiality and expert level of CBA performed
from the EU Funds, the CBA has to prove for the purposes of applications for EU funding.
positive net social benefits of his project. In For the officials deciding on the subsidy, as well
many programmes (e.g. Regional Operational as for the public, in whose interest is not to waste
Programmes and Operational Programmes money on unjustified projects, it is theoretically
Transport), the requirement to provide CBA possible to supervise CBA. However, the
has been derived from the project cost amount. general knowledge of the CBA methodology is
A CBA has to be performed if project costs very weak. This can be inferred from the fact
exceed a certain amount, typically tens or that CBA methodology is not included in the
hundreds of millions of CZK (roughly units or overwhelming majority of university economic
tens of millions of EURO), depending on the curricula. In such a situation, conscious officials
conditions of each operational programme. or conscious members of the public cannot
We demonstrate the chain of players in the be expected to perform an effective review.
Czech model of CBA performance for obtaining Moreover, taking into account the arguments
subsidies from EU Funds by the following of the public choice school, such as officials
scheme: action to their own benefit, rational ignorance
of voters, or the disadvantage of the public as
CBA performer subsidy applicant a specific interest group consisting in its low
officials processing subsidies the public level of organisation, an effective review and
the discovery of potential errors in real-world
Subsidy applicants are responsible for CBA cannot be expected.
providing CBA for their projects on their own
They typically commission the CBA with 4. The Survey among Czech CBA
commercial contractors offering such services. Performers
Subsidy applicants pay for the elaboration of In order to confirm our hypothesis of the
CBA with their own funds. The CBA performer is low level of expertise and impartiality in
therefore in a contractor-customer relationship performing CBA for purposes of EU subsidy
with the applicant. The CBA client is a customer applications, we carried out a survey among
whose interest is to prove a positive net social CBA performers. We addressed six randomly
benefit of the project in order to obtain the chosen commercial corporations which offer
subsidy. It is in the interest of the contractor consulting in the area of EU Structural Funds
to accommodate the customer. The CBA including CBA performance on the Czech
performer can choose many ways how to do so. market (according to expert judgement there
We showed methodological disunities which are tens of such corporations there). The survey
may affect the CBA result above. CBA results method chosen was a questionnaire with open-
can be further affected, for example, by the ended questions joined with a face-to-face
method of predicting future benefits and costs, interview. We questioned a representative
the choice of significant and unimportant from each of these corporations who takes
benefits and costs, which either enter the CBA part in performing CBA. The rate of response
or not, or the definition of stakeholders [13]. return was 100%. We inquired about (i) the

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expert background of addressed corporations used statistical data about the average wage
concerning CBA performance, (ii) the methods in the particular field of study, and performed
used in CBA by their corporation, and (iii) the an expert judgement about the increase of
rate of CBA performed by their corporation graduates wages above the average due to the
proving a welfare increase. school reconstruction. Annual benefits equalled
The answers to (i) uncovered that the sum of wage increases of graduates in
employees pursuing CBA are not necessarily a particular year. It is not clear however, if and
economists and therefore did not usually get in to which degree a better school environment
contact with CBA until in their job. If they are leads to higher education outcomes. The CBA
economists, they also often got in contact with performer did neither cite any study to prove his
CBA in their job for the first time. To be able hypothesis, nor did he realise his own survey
to elaborate CBA, CBA performers in these testing this hypothesis. This benefit may equal
companies use EU or national guides to CBA, to zero and loses its validity. A similar situation
visit additional training courses or learn about in the approach to costs and benefits appraisal
CBA from their colleagues. occurred in other companies of our sample.
As can be inferred from the answers to The unavoidable consequence is the loss of
(ii), none of the addressed companies used information power of these CBA results.
an exact and reliable scientific method of CBA The answers to the rate of CBA results
performance as known to economic theory proving a welfare increase (iii) ranged between
and as presented in economic textbooks, 90% and 100%. It shows a high rate of CBA
e.g. in [13]. As the responses of corporation proving a welfare increase by assessed
representatives show, these corporations projects. A bias in favour of the client can be
did not discuss the choice of benefits and demonstrated on the following statement of
costs entering CBA thoroughly. The choice a respondent. He stated that the costs and
of CBA inputs for appraisal was executed by benefits valuation is just manipulation with
the CBA performer without any support for numbers to prove beneficial effects of projects
his or her choice in academic sources. These for his customers.
chosen benefits and costs were subsequently It can be inferred from this survey that at
assessed with the utilisation of following data least a certain non-negligible segment of the
sources: clients of these corporations at the commercial CBA performers processes CBA
first place, less frequently existing statistical in an insufficient quality. At the same time,
data (mainly from Czech Statistical Office), and our findings lead us to conclude that CBA are
own expert judgements. None of the addressed not performed impartially and are frequently
respondent collected data on his own and purely formal. The validity of our survey results
used standard methods for benefits and costs may be supported in a broader context by the
valuation described in economic textbooks, conclusion of the UK National Audit Office
e.g. in [9], such as contingent valuation, or survey (cited in [23]) which was based on the
the hedonic price method. A typical procedure assessment of performed RIA. According to
of the data formation and data processing in this survey, the economic quality of English
CBA performed by corporations in our sample RIA using the cost-benefit appraisal is poor due
may be demonstrated on a case described to the poor quantification of benefits as well
by one of respondents. The case deals with as poor transparency of data sources. In this
the calculation of benefits thanks to a school context, the overall situation in the widespread
building reconstruction. The assumption of use of CBA seems unsatisfactory.
the performer was as follows: the school
building reconstruction leads to a better 5. Deliberations on a Solution
learning environment and therefore better The current way of applying CBA for the
employment opportunities of graduates due to purposes of applying for EU funding often
better learning outcomes. Better employment leads to mendacious, unreliable conclusions.
opportunities further lead to higher wages of In addition, a precisely performed CBA is
graduates. The increase of wages is one of costly and time consuming due to the need
the project benefits. The CBA performer stated of expressing all the benefits and costs in
that to evaluate this benefit, he took the data of monetary terms based on valuation methods
the number of school graduates from his client, discussed in economic textbooks, e.g. [9].

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Therefore the application of less demanding Alternative methods cannot be applied to
alternative evaluation instruments from the point projects that are original by nature and whose
of view of their methodology, where feasible, necessity is not clearly defined by a political
appears to be the first possible solution to the decision. CBA may appear as the only suitable
unsatisfactory use of CBA. Among others, an criterion for decisions particularly in such
alternative instrument is cost-effectiveness cases. However, CBA results have to be trusted
analysis (CEA) or cost-utility analysis (CUA), then. The results will only be trustworthy if
or other methods, such as discussed in [28]. the authors professionalism and interest in
CEA can be applied where a clear political goal performing CBA impartial can be relied upon.
is declared that can be reflected by a single CBA performers must not be answerable to EU
measure of effectiveness and only the most funding applicants to decrease the bias. The
effective path towards this goal is sought [18]. chain of players for the CBA elaboration for
CEA enables to choose projects that generate obtaining subsidies from EU Funds needs to
the greatest effect per dollar spent. CUA is be changed accordingly to enable an unbiased
a close relative to CEA. It works with the review of the project by CBA. Therefore we
preferences of individuals and seeks to choose propose the following mechanism:
a project, from which highest satisfaction of
individuals per dollar spent is gained. This officials
Subsidy
satisfaction is called utility. CUA works with processing the public
applicant
a single measure or multiple measures of subsidies
effectiveness [18]. Similarly to CEA, the
outcomes of alternatives are not necessarily CBA performer
expressed in monetary terms in CUA.
CEA and CUA are widely used in healthcare The reliability of the analyses will also be
[24] or education [18]. These areas are supported by the strict publication of the full CBA
characterised by a very difficult expression procedures that will enable an expert discussion
of non-monetary effects in monetary terms. of the CBA methodology and inputs, thus
There is no reason why CEA or CUA could not a more effective control. The CBA procedure
be applied more frequently in other areas too, must not be a black box. The possibility of
such as projects selection for EU funding, for a more effective control may at least decrease
instance in environmental protection area. Air the rate of the deliberate manipulation of the
pollution may be taken as an example of an CBA results. The trustworthiness of CBA would
area which may profit from the use of these be much helped if their performers were liable
methods. Pollution limits for substances such for clearly unprofessional CBA. This could be
as PM10 (fine dust particles in the air) are helped by publishing a kind of a blacklist of
exceeded in many regions and their reduction unprofessional CBA performers or certification
can be part of policy objectives defined in of expert CBA performers if the certificate might
Operational Programmes for EU funding. be suspended or revoked upon the identification
When a policy objective is set, the most cost- of clearly unprofessional CBA.
effective way towards its fulfilment is sought.
Measures reducing the emissions of PM10 to Conclusion
the air frequently have additional outcomes too, Generally speaking, there is an agreement
such as a reduction in the emissions of sulphur among mainstream economists that in a certain
dioxide and greenhouse gases. CEA would not form and circumstances, CBA is the best possible
take these side effects into account. CUA would evaluation tool for public sector decision-making.
take them into consideration by the assignment CBA introduces a certain order to decision-
of specific weights to different pollutants. Neither making. The possibility of arguing based on its
CEA nor CUA are problem-free in their practical results improves the transparency of decision-
applications however. [17] bring ex-post making and allows more effective control over
evaluation of twenty four CE studies of cancer politicians actions. Nonetheless, CBA faces
therapies and find considerable methodological considerable practical problems which may
flaws in a significant number of them. Similarly, impose limitation on its use.
[11] critically appraised fifty-four CU studies in The paper deals with the question of
child health with a similar conclusion. trustworthiness of practical execution of CBA on

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an example of CBA performance. Our concerns discounting. Science of the Total Environment.
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 Business Administration and Management

Abstract
COST-BENEFIT ANALYSIS: TOO OFTEN BIASED
Elika Vejchodsk

Cost-benefit analysis (CBA) is widely applied in many countries in evaluating public projects
and regulatory instruments. It is employed, for example, as a basis for decisions within the
European Unions subsidy policy. CBA enables to express the comprehensive effect of a project
or a governmental regulation on social welfare and thereby to introduce expertise to political
decision-making. However, its practical applications face many problems. Different methodological
choices in performing CBA enable to obtain diametrically opposite conclusions. Moreover, the
way how investors apply for EU Fund subsidies encourages CBA performers to adjust CBA
results to requirements of subsidy applicants. The unavoidable consequence is frequently
mendacious, unreliable and misleading CBA. The paper brings an overview of the flexibility in CBA
methodological choices. It further focuses on analysing the CBA performance practice in the area
of CBA project appraisal for the purposes of applying for EU funding. We examine the reasons for
manipulating results using a theoretical analysis and support our findings by our own empirical
survey among CBA performers. As our survey among commercial CBA performers uncovers, many
entities performing CBA lack expert background for CBA performance and performed CBA are
often biased and misleading. Our theoretical analysis shows its main reason: The person choosing
and remunerating the CBA performer for the purposes of a project appraisal for EU funding is at the
same time the subsidy applicant and thus with a clear interest in the optimistic result of the CBA.
CBA performers are happy to oblige their customers. The remedy to this situation is to get rid of this
unintentional alliance among CBA performers and subsidy applicants.

Key Words: Cost-benefit analysis, CBA, bias, reflection, Czech Republic.

JEL Classification: D61, Q38.

DOI: 10.15240/tul/001/2015-4-005

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