Assets for Independence Act Evaluation:
Design Phase, Concept Paper
February 16, 2000
7. |
Benefit-Cost Analysis |
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| Alternatives To IDAs | |||
| Benefits And Costs For Different Groups | |||
| Benefit-Cost Accounting | |||
| References | |||
Stakeholders in Individual Development Accounts (IDAs) include government, private donors, users, non-users, administrators, and society as a whole. Each group has its own roles and its own goals, and so each group has different benefits and costs. If IDAs are to succeed, then each group must play its part; for a given group to play its part, its benefits must exceed its costs (Schreiner, 1997).
The benefit-cost analysis will rigorously analyze outcomes for all six groups. It will ask not only whether benefits exceed costs (sign of impact), but also by how much benefits exceed costs (size of impact). It will also try to explain the causes of impact; perhaps the most important output of the demonstration will be improved knowledge of how to increase benefits and decrease costs through improved rules of policy, design of IDA contracts, technology of supply, organization of administration, and implementation of IDA-related services.
Like the rest of the evaluation, the benefit-cost analysis aims at rigor. This is not to pretend to quantify all benefits and costs. Such exhaustive measurement is impossible; real knowledge is always incomplete and imperfect. Also, most benefits and costs are intangible and subjective, unquantifiable even to those who experience them.
A rigorous analysis will not eschew all measurement, but rigor goes far beyond mere quantification. Rigor is the care to make explicit the inevitably subjective judgments and assumptions required to reach conclusions (Schreiner, 1999a). The goal of rigor is to expose the building blocks of arguments so as to make them susceptible to improvement through open discussion and criticism. Rigor and explicit arguments-not falsificationist experiments and numbers-are the heart of the social scientific method.
Of course, the benefit-cost analysis here will measure as much as it can. In particular, it is inexpensive to measure cash flows. Most effects, however, are expensive to measure because they are so subtle, diffuse, complex, and intangible. For example, probably the most important hypothesis in asset-based welfare theory is that IDAs spark hope (Sherraden, 1991). People with an IDA expect to have resources in the future, and this knowledge may change their choices and efforts. Hope is real; unfortunately, it is difficult to capture in a single number. Whether IDAs are worthwhile, however, may hinge on how they increase hope, so the benefit-cost analysis must include subjective judgments of the worth of changes in hope caused by IDAs. The subjectivity of these judgments does not mean that their support should be arbitrary or opaque; rather, the analysis must be even more careful to explain carefully and explicitly the experiences, reasons, and assumptions behind the judgments.
The first benefit-cost analysis of IDAs was by Clones et al. (1995). Although the work uses almost no measurements because few data on IDAs were then available, the pro forma analysis is extraordinarily rigorous. Clones et al. carefully identify different sources of benefits and costs for different groups and then discuss which ones they might measure, which ones they cannot measure, and the reasons and logic behind the assumptions that stand in for measurements. The new work here will build on this solid base, replacing some assumptions with previously unavailable measurements and improving on the methods used to compare benefits and costs for different groups.
Alternatives to IDAs
IDAs are just one of many tools to help the poor. Resources used for IDAs could have been used in some other way. For example, they could have been distributed to the poor as cash, allocated to public schools, used to pay down the national debt, spent on roads, or even returned to taxpayers. Because there are alternatives, it is not enough that IDAs simply have some benefits; benefits must be so great as to exceed costs.
Benefits and costs take place at different points in time, so the
analysis will use discounting to ensure that all figures are in comparable
units.
Benefits And Costs For Different Groups
Government
Benefits and costs for the government are relatively simple to measure because most of the effects involve cash flows. Examples include cash entrusts to IDA administrators and wages paid to government employees who manage IDA policy.
The government also receives benefits from IDAs. These include increases in tax receipts and decreases in expenses for such things as public assistance and prisons. These benefits are measured as the differences caused by IDAs in cash flows between the government, members of the experiment group, and members of the control group.
Private investors
Under AFIA, government funds must be matched by funds from private donors. Private donors do not expect a financial return, but they do expect a return in terms of improved well-being for some target group. It is difficult to compare non-financial benefits with financial costs. Whether benefits exceed costs for private donors can, however, be inferred from whether the donor makes donations more than once.
Participants
The evaluation framework developed by Schreiner (1999b and 1999c) compares benefits and costs as seen by participants. The framework highlights trade-offs between six aspects of costs and benefits that parallel standard concepts in benefit-cost analysis (Belli, 1996; Brent, 1996; Gittinger, 1982):
Worth to participants (willingness to pay)
Cost to participants (price, transaction, and opportunity costs)
Depth (Social value of worth minus cost for a given user)
Breadth (Number of participants)
Length (Time frame of participation)
Scope (Range of services supplied and used)
Non-participants
IDAs affect not only but also non-participants. For example, costs for the government are costs for taxpayers. Costs are also borne by non-participants who receive less assistance than if funds for IDAs were used for some other program.
People lucky enough to have access to IDAs will displace some non-participants without access. For example, microentrepreneurs with IDAs will squeeze the market share of some other microentrepreneurs. Likewise, people who use IDAs to buy homes will bid up prices and squeeze out even poorer people who otherwise might have bought homes. As a rule, the impacts of IDAs on non-participants depend on the general-equilibrium response of the supply of the assets that IDAs subsidize. Unless supply expands, IDAs may merely shift well-being from low-resource non-participants to participants. Of course, if prices rise, then supply will expand, but prices rise only if some people crowd others out.
Non-participants, especially family members of participants, also get benefits from IDAs. For example, children of homeowners and of college graduates tend to have more success otherwise (Page-Adams and Vosler, 1997; Cheng and Page-Adams, 1996; Page-Adams and Sherraden, 1996; Scanlon, 1996). Furthermore, homeownership has positive affects on children in the neighborhood.
Administrators
The non-government employees who administer IDA programs will perform best when their own benefits exceed their own costs. Benefits as seen by administrators include wages, perks such as travel to conferences, and satisfaction from the attempt to help low-resource people. Costs include their time and effort at work on IDA programs.
Society
In the end, IDAs are meant to produce social benefits in excess of social costs. The only reason to measure net benefits for government, private investors, participants, non-participants, and administrators is because the cooperation of all these groups is needed if IDAs are to be worthwhile for society as a whole. Any one group of stakeholders can sabotage IDAs, so each group must be satisfied if IDAs are to succeed.
In the simplest terms, benefits net of costs for society as a whole
is the aggregate of benefits net of costs for the other five groups
of stakeholders.
Benefit-Cost Accounting
As an illustration, Exhibit 7-1 breaks down costs and benefits from cash flows (or from implicit cash flows) that result from the use of IDAs for home purchase, microenterprise, and post secondary education. The exhibit lists basic categories of measures of cash flows from the point of view of participants, the federal government, other public and private investors, and society as a whole. (The exhibit excludes nonparticipants and administrators of IDA programs because changes in their cash flows will not be estimated.) For any given group, net benefits equal benefits minus costs. For society as a whole, benefits, costs, and net benefits equal the corresponding effects summed across the three individual groups.
| Measure | Participants | Federal Government |
Other Public and Private Investors |
Society |
|---|---|---|---|---|
| Benefits (+): | ||||
|
Home purchase |
housing value, net of taxes and transfer payments |
federal taxes and transfer payments |
state and local taxes and transfer payments |
sum (row)
|
| Micro-enterprise | inputed income, net of taxes and transfer payments |
federal taxes and transfer payments |
state and local taxes and transfer payments |
sum (row)
|
| Post-secondary Education |
inputed income, net of taxes and transfer payments |
federal taxes and transfer payments |
state and local taxes and transfer payments |
sum (row)
|
| Costs (-): | deposited funds | matching funds, administrative costs |
matching funds, administrative costs |
sum (row)
|
| Net Benefits: |
sum (column)
|
sum (column)
|
sum (column)
|
sum
|
For participants, the cash costs of participation in an IDA program are the funds placed on deposit. Deposited funds have an opportunity cost because they are unavailable for other uses. Participants get benefits when they use deposits for home purchase, microenterprise, or post secondary education. Implicit cash benefits from home purchase include the home equity that results from the use of IDA funds and part of the tax breaks that result from home mortgage interest deductions. These benefits are net of reductions in transfer payments received, such as the loss of direct housing subsidies. For microenterprises, cash benefits include the value of increases in net worth caused by asset purchases made with IDA funds and increases in business income. Netted out of these benefits are business taxes and reductions in transfer payments and in non business income caused by the use of IDAs. For post secondary education, cash benefits include projected lifetime increases in income, net of increased taxes and decreased transfer payments. For all three uses of IDAs, the cash benefits net of taxes and transfer payments will be estimated based on observed differences between members of the treatment and control groups.
For the federal government, costs result from budget outlays for matching funds and for administrative expenses of IDA programs, as well as for the expenses of the federal government's own program administrators. Cash benefits for the federal government include net increases in tax receipts and net decreases in transfer payments. For example, increased microenterprise and post secondary education may increase incomes and thus tax receipts. They may also decrease outlays for means tested transfer payments. At the same time, home purchase may lead to decreased tax receipts due to home mortgage interest deductions.
For state and local governments, cash costs and benefits resemble those of the federal government in that they result from changes in tax receipts and transfer payments and from budget outlays for matching funds and administrative expenses. Private investors bear costs in that they provide cash for matching funds and administrative expenses, but of course the cash flows of private donors are not directly affected by changes in tax receipts and transfer payments.
For society as a whole, the benefits or costs are the summed effects for participants, the federal government, and other investors. At the societal level, the effects on taxes and transfer payments net to zero. Societal benefits thus equal the sum of increased housing value and higher incomes for participants; societal costs equal are the sum of participant deposits, matching funds, and administrative costs.
All benefits and costs will be expressed as discounted present values,
in dollars per participant. This will require the choice of an appropriate
discount rate. Sensitivity analysis will be conducted using alternative
assumptions for the discount rate. As specified in the Assets for
Independence Act, the benefit-cost calculations will be carried out
for time horizons of five years and ten years.
References
Belli, Pedro. (1996) Handbook on Economic Analysis of Investment Operations, Operations Policy Department, World Bank: Washington, D.C., pbelli@worldbank.org.
Brent, Robert J. (1996) Applied Cost-Benefit Analysis, Cheltenham: Edward Elgar, ISBN 1-85898-285-5.
Cheng, Li-Chen; and Deborah Page-Adams. (1996) "Education, Assets, and Intergenerational Well-Being: The Case of Female-Headed Families", Center for Social Development Working Paper No. 96-3, Washington University in St. Louis.
Clones, Daphne; Friedman, Robert; Grossman, Brian; and Cicero Wilson. (1995) The Return of the Dream: An Analysis of the Probable Economic Returns on a National Investment in Individual Development Accounts, Washington, D.C.: Corporation for Enterprise Development, ISBN 1-883187-07-9, cfed@cfed.org.
Gittinger, J. Price. (1982) Economic Analysis of Agricultural Projects, Second Edition, Baltimore: Johns Hopkins University Press, ISBN 0-8018-2912-7.
Page-Adams, Deborah; and Nancy Vosler. (1997) "Homeownership and Well-Being Among Blue-Collar Workers", Center for Social Development Working Paper No. 97-5, Washington University in St. Louis, csd@gwbssw.wustl.edu.
Page-Adams, Deborah; and Michael Sherraden. (1996) "What We Know About Effects of Asset-Holding: Implications for Research on Asset-Based Anti-Poverty Initiatives", Center for Social Development Working Paper No. 96-1, Washington University in St. Louis, csd@gwbssw.wustl.edu.
Scanlon, Edward. (1996) "Homeownership and its Impacts: Implications for Housing Policy for Low-Income Families", Center for Social Development Working Paper No. 96-2, Washington University in St. Louis.
Schreiner, Mark. (1999a) "A Review of Evaluations of Microenterprise Programs in the United States", manuscript, Center for Social Development, Washington University in St. Louis, gwbweb.wustl.edu/users/schreiner/.
_____. (1999b) "Aspects of Outreach: A Framework for the Discussion of the Social Benefits of Microfinance", Center for Social Development Working Paper No. 99-3, Washington University in St. Louis, gwbweb.wustl.edu/users/schreiner/.
_____. (1999c) "A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh", Center for Social Development Working Paper 99-5, Washington University in St. Louis, gwbweb.wustl.edu/users/schreiner/.
_____. (1997) A Framework For the Analysis of the Performance and Sustainability of Subsidized Microfinance Organizations With Application to BancoSol of Bolivia and to the Grameen Bank of Bangladesh, unpublished Ph.D. dissertation, The Ohio State University, gwbweb.wustl.edu/users/schreiner/.
Sherraden, Michael. (1991) Assets and the Poor: A New American Welfare
Policy, Armonk, NY: M.E. Sharpe, ISBN 0-87332-618-0, csd@gwbssw.wustl.edu.
