Making the list: What should a cost-benefit analysis include?
When done correctly, cost-benefit analysis (CBA) is comprehensive and rigorous. It’s not surprising, then, that those of us who work on CBA like to condense and summarize what the process entails, and ultimately list the criteria for a quality analysis. This kind of list can help readers answer the question “Can I take this study seriously?”
Last week another useful list emerged when the Results First Initiative, a project of the Pew Charitable Trusts and the MacArthur Foundation, published the report States’ Use of Cost-Benefit Analysis: Improving Results for Taxpayers. Through a CBA literature review and discussions with academics and practitioners that served as a foundation for States’ Use of Cost-Benefit Analysis, the new report identifies eight key elements used to define and classify studies as CBAs. These eight elements, listed on page 42 of the report, are as follows:
- The study comprehensively measures direct costs.
- The study comprehensively measures indirect costs.
- Tangible benefits are monetized to the extent possible.
- Intangible benefits are monetized to the extent possible.
- Program costs and benefits are measured against alternatives or a baseline.
- Future costs and benefits are discounted to current year values (net present value).
- Key assumptions used in calculations are disclosed.
- Sensitivity analysis is conducted to test how the results would vary if key assumptions were changed.
Others in the field offer slightly different versions of these criteria. A report by the Australian Institute of Criminology, for example, included an “Eleven-Point Quality Checklist for Assessing Economic Evaluations” from a textbook about economic evaluations of health care programs. In their book Investing in the Disadvantaged, editors Aidan Vining and David Weimer outline nine steps for conducting a CBA.
Similarly, CBKB developed a two-page guide, “How to Read a Cost-Benefit Study,” to accompany our webinar on the same topic. Both resources help people extract the most important information from cost-benefit reports.