CRJS 4466 PROGRAM & POLICY EVALUATION LECTURE #6 Evaluation projects Questions?

Economics and Program Evaluation

Figure 7.1:Economic Evaluation in the Performance Management Cycle

Cost-benefit analysis (CBA): costs and benefits of a program are given monetary value in order to determine the net benefit of the program Cost-effectiveness analysis (CEA): costs are monetized, but benefits are valued in substantive social value terms: different approaches/programs are compared to determine most effective approach Cost-utility analysis (CUA): costs are monetized, but benefits are valued across a number of different substantive social value outcomes in order to determine the most useful (effective/efficient) approach Note that ‘attribution’ or establishing the ‘cause’ of an outcome, and its cost, remain important methodological issues.

Choice of economic analysis method is decided by type of program involved, information available, and goal of the economic analysis Note distinctions between the ‘operational costs’ versus ‘social costs’ versus ‘foregone (opportunity) costs’ of a program or policy Tangible versus intangible costs and benefits – direct and indirect costs/benefits Discounting – important to understand ‘sunk costs’ and current/future benefits in calculating costs/benefits of programs

Copyright Sage Publications, From Program Evaluation and Performance Measurement: An Introduction to Practice. James C. McDavid and Laura R.L. Hawthorn. Discounting Example As an example, suppose that a cost is expected to accrue three years from the present. Assume the prevailing rate of interest is 10 percent, and the expected amount of the cost in year three is $100. The present value of that cost is:

Sensitivity analysis – using discounted costs, a range of these, to construct a set of ‘scenarios’ so that decision=makers can make decisions by looking at a range of possibilities Note: economic analyses go hand-in-hand with process evaluation and outcome evaluation – ultimately, programs require funding to be successful, and to be continued, and economic approaches help to justify good programs or revise/change poorly performing programs

Cost-utility analysis – more come in health-related fields, where life tables are used to assess cost of various interventions for reducing mortality/extending years of life

Table 7.1:Example of a QALY league table

Cost-benefit analysis – fully monetized costs and benefits – more commonly seen in business-related applications Real costs/benefits versus pecuniary costs/benefits ‘Willingness to pay’ as an important concept Cost/benefit ration and the rate of return on investment

Methodology of cost-benefit analysis “benefits and costs must be defined from a single perspective because mixing points of view results in confused specifications and overlapping or double counting”(Rossi, Freeman and Lipsey, 1999) Accounting perspectives – Individual target – Program sponsor – Community aggregates (communal)

Individual – target accounting perspective Takes the point of view of the units that are the program target Can provide for the highest benefit-to-cost results because this group rarely bears the cost of the intervention

Program sponsor accounting perspective Takes the point of view of the funding source in valuing benefits and specifying cost factors “analysis from this perspective is designed to reveal what the sponsor will pay to provide a program and what benefits (or “profits”) should accrue to the sponsor” (Rossi, Freeman and Lipsey, 1999) Most appropriate perspective when choices need to be made by the sponsor between alternative programs in the face of fixed budget

The communal accounting perspective Takes the perspective of the community or society as a whole (usually in terms of total income) Most comprehensive approach but also most complex Special efforts are made to account for secondary or indirect project effects – effects on groups that are not directly involved in the intervention (Rossi, Freeman and Lipsey, 1999) “Can also be expanded to include equity considerations, that is the distributional effects of programs among different subgroups” (Rossi, Freeman and Lipsey, 1999)

Communal perspectives include costs and benefits from the other types of perspectives but monetize and value items differently But communal perspectives include opportunity costs Generally the communal perspective is the most politically neutral

Measuring costs and benefits Potential problems: – Identifying and measuring all program costs and benefits – Expressing all costs and benefits in terms of a common denominator (translating them into money values) – Social programs do not often produce results that can be valued accurately by means of market prices – Sometimes cost-effectiveness analysis should be used because with this form of analysis benefits needn’t be valued

Monetizing outcomes Money measurements – Estimate of direct monetary benefits Market valuation Econometric estimation Hypothetical questions Observing political choices Opportunity costs Secondary effects (externalities) Shadow prices – Derived prices meant to reflect their true benefit and cost Discounting

Comparing costs to benefits Simple method (net benefit) – Subtract costs from benefits Ratio of benefits to costs – More difficult to interpret