Forecast Errors and Welfare Conclusions Based on the Flyvbjerg Database

The so-called Flyvbjerg database is the largest source of data on the performance of major investment projects. It has generated influential analyses of the magnitude of and reasons for cost overruns and demand shortfalls in major projects. Those analyses have demonstrated, among other things, the systematic presence of large forecast errors in both construction costs and in user demand in the first year of operation. They have also linked those results to the social welfare consequences of the underlying projects, suggesting that the large and systematic forecast errors are indicative of welfare destruction. Given how influential those analyses have been, this paper examines the link between the database, empirical analyses thereof, and social benefit–cost analysis (BCA). To that end, both the measurement of variables in the database and the estimation of forecast errors are contrasted against BCA. The conditions for the estimated forecast errors to approximate those obtained from a BCA are spelled out, and the scope for drawing welfare conclusions based on those estimates is discussed. Furthermore, numerical simulations are presented to explore whether the estimated forecast errors do indeed imply likely welfare destruction. The simulations suggest that as large as the forecast errors are, welfare destruction is no foregone conclusion.