The Efficiency Potential in Social Programs: Accounting for Heterogeneity in Benefit-Cost Analysis 1

Traditionally, benefit-cost analyses focus on average benefits and average costs. However, heterogeneous treatment effects and/or costs are most often present, which means that there is an efficiency potential hidden in the implementation of public programs, if policies can be targeted at those who, net of costs, benefit the most. We introduce efficiency potential defined as the ratio between the net benefit achieved under perfect selection of the individuals with significant positive net benefit of program participation, and the actually realized benefits net of costs. Using data from a randomized control-trial experiment of a Danish return-to-work program combined with rich administrative records and survey data, we find that there is indeed a potential for increased efficiency. Results from the treatment literature indicate that, generally, it may be difficult to harvest the full potential. Our application corroborates this finding.