Cost-Benefit Analysis and the Evaluation of the Effects of Corruption on Public Projects

Abstract

Cost–benefit analysis (CBA) is the basis for rational economic decision making, whether it is for the government or individuals. If benefits are greater than costs, then a project or activity should be expanded. If costs are greater than the benefits, the project or activity should be contracted. And if benefits equal costs, the existing scale of operations is optimal. A social CBA obtains its measurement principles concerning the benefits and costs from applied welfare economics. Its main purpose is to incorporate considerations into public expenditure decision making that caused private market decision making to fail to produce optimally (due to the existence of externalities) or produce at all (pure public goods). However, these corrections for market failure lead only to potential gains. Once the public sector is involved there is also the potential for government failure. Public officials may have an agenda that is different from social welfare maximization. In particular, if these public officials are corrupt and try to maximize bribes which they keep for themselves, then this reality needs to be included as part of the cost–benefit evaluation. The Executive Board of the World Bank defined corruption in 1997 as: ‘The use of public office for private gain’. This definition is also the one used by Bardhan (1997) in his survey of corruption and development.