DYNAMIC INCONSISTENCY PROBLEM OF PUBLIC INVESTMENT BASED ON COST-BENEFIT ANALYSIS

Abstract

Cost-benefit analysis (CBA) is used to optimize public investments and its procedures have been established for most urban public services in many countries. However, once CBA is mandatory, residents can strategically behave taking the CBA method into account. The strategic behavior is facilitated by a dynamic inconsistency in which the CBA-based optimal service level depends on the behaviors of residents. The paper discusses the dynamic inconsistency problem taking transportation service as an example and concludes that the problem may decrease both, social welfare and the utility of residents, as compared with the first best case.