Benefit–cost analysis using data envelopment analysis

Benefit–cost analysis using data envelopment analysis

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Article ID: iaor20071996
Country: Germany
Volume: 145
Issue: 1
Start Page Number: 229
End Page Number: 250
Publication Date: Jul 2006
Journal: Annals of Operations Research
Authors: , , ,
Keywords: statistics: data envelopment analysis
Abstract:

Benefit–cost analysis is required by law and regulation throughout the federal government. Robert Dorfman declares ‘Three prominent shortcomings of benefit–cost analysis as currently practised are (1) it does not identify the population segments that the proposed measure benefits or harms (2) it attempts to reduce all comparisons to a single dimension, generally dollars and cents and (3) it conceals the degree of inaccuracy or uncertainty in its estimates’. The paper develops an approach for conducting benefit–cost analysis derived from data envelopment analysis that overcomes each of Dorfman's objections. The models and methodology proposed give decision makers a tool for evaluating alternative policies and projects where there are multiple constituencies who may have conflicting perspectives. This method incorporates multiple incommensurate attributes while allowing for measures of uncertainty. An application is used to illustrate the method.

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