Formality and Informality in Cost-Benefit Analysis
80 Pages Posted: 28 May 2014 Last revised: 27 Jul 2015
Date Written: June 17, 2015
Cost-benefit analysis (CBA) is usually treated as a monolith. In fact, the term can refer to a broad variety of decision making practices, ranging from a qualitative comparison of pros and cons to a highly formalized and technical method grounded in economic theory that monetizes both costs and benefits, discounts to present net value, and locates the point at which the marginal benefits curve crosses the marginal costs curve. This article develops a typology that helps to conceptualize the multiple varieties of CBA along a formality-informality spectrum. It then uses this typology to analyze the treatment of CBA by the academic community and the three branches of the federal government. In academic and policy circles, the formal end of this spectrum generates far more controversy than the informal end. Additionally, the law (federal environmental statutes and case law) seems to favor informal over formal varieties of CBA. Nonetheless, the executive branch appears to be moving toward the formal end of the spectrum. Executive Orders and guidance documents direct agencies to conduct a highly formal mode of CBA. And anecdotal evidence suggests that agencies often go out of their way to give their CBAs the trappings of formality, sometimes in ways that lead to irrational results. I argue that 1) failing to distinguish between formal and informal CBA, and the many varieties in between, has led to muddled thinking and to misuses of CBA; and 2) the trend toward formality in the executive branch is out of step with Congress and the courts and may be counterproductive, where, for example, it leads to what I call “false formality” — a corruption of CBA that can occur when agencies fail to clearly and consistently define where on the formality-informality spectrum a particular CBA falls.
Keywords: cost-benefit analysis, economic theory, typology, federal law, executive branch
JEL Classification: K00, K23, K32
Suggested Citation: Suggested Citation