Cost‐Benefit Analysis: An Organizational Design Perspective

Abstract

This article analyzes cost-benefit analysis (CBA) from an organizational design perspective, a viewpoint not previously offered in debates about CBA. This perspective, widely used in the business literature, reveals business firms do not use CBA for anything but routine, non-complex decisions because they operate in uncertain environments. Likewise, regulators operate under conditions of bounded rationality, forcing them to eschew CBA and adopt the same type of heuristical decision-making used in private organizations. Despite this, a recent book by Dean Revesz and Professor Livermore favors the use of CBA. Like other CBA supporters, they insist on comprehensive rationality and ignore what Nobel laureate Herbert Simon has taught us. With bounded rationality, decision-making that serves the ends of an organization is "rational," even if it is not based on CBA.