NIJ Research In Brief: Cost-Benefit Analysis

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U.S. Department of JusticeOffice of Justice ProgramsNational Institute of JusticeJUNE 2014N ATION A L INSTIT U TE OF JUSTICERESEARCHIN BRIEFCost-BenefitAnalysisA GUIDE FORDRUG COURTS ANDOTHER CRIMINALJUSTICE PROGRAMSBY P. MITCHELL DOWNEYAND JOHN K. ROMAN

U.S. Department of JusticeOffice of Justice Programs810 Seventh St. N.W.Washington, DC 20531Eric H. Holder, Jr.Attorney GeneralKarol V. MasonAssistant Attorney GeneralGreg RidgewayActing Director, National Institute of JusticeThis and other publications and productsof the National Institute of Justice can befound at:National Institute of Justicehttp://www.nij.govOffice of Justice ProgramsInnovation Partnerships Safer Neighborhoodshttp://www.ojp.usdoj.gov

JUNE 2014N AT ION A L INST I T U TE OF JUST ICERESEARCHIN BRIEFCost-BenefitAnalysisA GUIDE FOR DRUG COURTS ANDOTHER CRIMINAL JUSTICE PROGRAMSBY P. MITCHELL DOWNEY AND JOHN K. ROMANFindings and conclusions of the research reported here are those of theauthors and do not necessarily reflect the official position or policies of theU.S. Department of Justice.NCJ 246769

RESEARCH IN BRIEF3Cost-BenefitAnalysisA GUIDE FOR DRUG COURTS ANDOTHER CRIMINAL JUSTICE PROGRAMSBY P. MITCHELL DOWNEY AND JOHN K. ROMANPolicymakers and practitioners face difficult decisions when theyallocate resources. As resource constraints have tightened,the role of researchers in informing evidence-based and costeffective decisions about the use of funds, labor, materials andequipment — and even the skills of workers — has increased. We believeresearch that can inform decisions about resource allocation will be a centralfocus of criminal justice research in the years to come, with cost-benefitanalysis (CBA) among the key tools. This report about the use of CBA isaimed at not only researchers but also practitioners and policymakers whouse research to make choices about how to use limited resources. Althoughwe include NIJ’s Multi-site Adult Drug Court Evaluation (MADCE) as anexample of CBA in practice, this report is not just about using CBA indrug courts.Our intent is to help researchers, state agencies, policymakers, programmanagers and other criminal justice stakeholders understand: What CBA is and in which contexts it is appropriate.National Institute of Justice NIJ.gov

4Cost-Benefit Analysis: A Guide for Drug Courts and Other Criminal Justice Programs Which kinds of information can — and should — be collected to facilitatea CBA. What the results of a CBA mean.This report is divided into three sections. In the first section, “The Basics ofCost-Benefit Analysis,” we describe the foundations of CBA: the motivationfor performing a CBA, what CBA can (and cannot) tell us, and the generalprinciples used in conducting CBA in terms of the conceptual basis and anapplied framework. In the second section, “Cost-Benefit Analysis in Action:NIJ’s MADCE,” we apply the framework and illustrate the necessary stepsusing NIJ’s MADCE as a case study. In the third section, “NIJ’s MADCEResults,” we present the findings from NIJ’s MADCE and demonstrate howthe results provide new and useful information that would not have beenavailable without conducting such an analysis.Report HighlightsIn this report, we address several key cost-benefit analysis (CBA)concepts, including: The difference between what cost-benefit researchers believe theyare producing and what policymakers often believe they are receiving.Researchers believe they are estimating societal benefits, whereaspolicymakers believe they are receiving estimated fiscal benefits; thisconfusion has important policy implications (see “Cost-benefit analysis:What and why” on page 5). A variety of data sources and analytical approaches that have wideapplicability throughout criminal justice CBA (see “Site-specific prices”on page 16 and “National prices” on page 17). Practical considerations for conducting a CBA and a look at informationoften missing from technical reports, which tend to focus more onprinciples and theoretical foundations (see sidebar, “PracticalConsiderations of Conducting a Cost-Benefit Analysis,” on page 20).National Institute of Justice NIJ.gov

RESEARCH IN BRIEF5The Basics of Cost-Benefit AnalysisCost-benefit analysis: What and why. Why conduct a CBA? Unlikeother types of analysis, CBA offers a comprehensive framework forcombining a range of impacts. Consider a law that bans smoking inrestaurants. Such a law has several positive effects (called benefits),including improved health of restaurant staff and diners as well as a morepleasant atmosphere for nonsmokers. The same law, however, also hassome negative impacts (called costs), such as inconveniencing smokersand the added expense to restaurant owners to enforce and publicize thenew law. Note that these impacts are not all financial. Although money isa useful metric for combining diverse outcomes, the key contribution ofCBA is providing a framework on which to combine diverse impacts.CBA is usually subject to two key criticisms. First, some people argue thatCBA values things that cannot be valued, such as pain and suffering fromviolent victimization or loss of life. A common response to this criticismis to ask, “Would you support a program that spent 1 trillion to preventa single homicide?” If you would not support such a program, then youare implicitly conducting a CBA and designating the value of a human life.In the same way, CBA seeks to balance the use of resources to solve avariety of problems, but to do so using evidence carefully, consistently andtransparently.The second criticism involves the way in which things are valued. Forinstance, CBA theory uses wages and earnings to approximate the valueof someone’s time and his or her productivity (see sidebar, “Considerationsin Valuing Time”). Suppose a probation officer makes 25 per hour and aprogram saves him or her one hour. Standard CBA counts that one hoursaved as a 25 benefit of the program. Many people find this approachinappropriate. The program may save one hour of “probation officer time,”but this savings doesn’t reduce agency costs. This issue highlights theimportance of understanding CBA’s goals: CBA does not seek to estimatefiscal savings but, rather, seeks to estimate social value. If that sameprobation officer spends his or her time doing another productive activity,as is assumed in CBA and economic theory, then this is a productivitygain and a benefit of the program. Still, it is reasonable (in our view) toNational Institute of Justice NIJ.gov

6Cost-Benefit Analysis: A Guide for Drug Courts and Other Criminal Justice Programscriticize this assumption. This criticism, however, doesn’t reject CBA inits entirety — rather, it is an argument about how CBA is conducted. Agood CBA makes its assumptions transparent and identifies how theseassumptions affect the results.These arguments are not the only criticisms of CBA. Analysts oftendebate what discount rate to use, the validity of willingness-to-pay in thepresence of inequality, and the difficulty in valuing equity and justice. In thisreport, we focus on the two criticisms initially described, because they arecommonly heard and can be addressed through the practice of CBA.CBA is inherently comparative; it is particularly useful for comparing twoprograms or alternatives that may have different types of impacts. Whena program’s net benefits are compared with zero (i.e., deemed “costbeneficial” or “not cost beneficial”), the net benefits are implicitly beingcompared with business as usual (i.e., what is usually done without thepolicy change).CONSIDERATIONS IN VALUING TIMEA critical element of cost-benefit analysis (CBA) is valuing the time spent by workers. Aprogram might increase a probationer’s time spent with a probation officer, reducing theamount of time that the officer has to fulfill other responsibilities. It is possible that neitherof these outcomes will have an impact on an agency’s spending, but if the time could havebeen spent productively on other activities, then both outcomes have implications for availableresources. In other words, without the program, the officer may have conducted additionalpatrols, thereby contributing to society. Spending time on additional patrols and communitybased approaches to crime prevention contributes to the larger community. Withoutthe program in place, the probation officer may instead spend time on enhanced clientinteractions that are designed to reduce violence and revocations. CBA draws upon a longtradition in economic theory and assumes that an individual’s wage is equal to the marginalvalue contributed to society by his or her time. This assumption is an uncomfortable one formany people, including the authors of this report. However, this approach remains standardpractice in the literature, and this report repeatedly uses wages to measure productivity andthe social value of time.

RESEARCH IN BRIEF7What Cost-Benefit Analysis Can and Cannot DoCost-benefit analysis (CBA) can: Tell us the impact of a program on a wide range of outcomes. Offer guidance on how to balance these diverse impacts. Tell us how the program draws from (or contributes to) the pool ofavailable resources.CBA cannot: Provide the end-all, be-all, irrefutable, definitive answer to all policyquestions. Do anything without a strong impact analysis. Tell us how much money an agency or jurisdiction will save byimplementing a particular program.CBA is useful because it combines different types of information into asingle metric, allowing for comparisons that could not otherwise be made.CBA provides guidance on how to balance these different types of impacts.CBA also tells decision-makers how the program draws from or adds toresources (not just funding) that are available for other programs and offersguidance on what it would take to replenish those resources.CBA, however, is not a magic bullet that can answer all policy questions.For one thing, without a strong impact evaluation, a CBA is meaningless;that is, to estimate (and value) the impact of a program on resources,we need to be able to convincingly estimate what effect the programhad (i.e., compare outcomes when the program is present with outcomeswhen the program is absent). To do so requires implementing a strongresearch design (including, but not limited to, random assignment) andcollecting enough data for both the treatment and comparison groups todetermine what would have happened in the absence of the program.Because CBA is inherently comparative, data about program participantsalone is not enough. Second, although CBA theory provides a frameworkfor valuing any impact, as a matter of practice, impacts often simply can’tbe valued (see “Cost-Benefit Analysis in Action: NIJ’s MADCE” on page 11).National Institute of Justice NIJ.gov

8Cost-Benefit Analysis: A Guide for Drug Courts and Other Criminal Justice ProgramsFinally, CBA does not tell us how much money an agency or jurisdictioncan expect to save from a particular program. This is not the purpose ofa CBA, and the methods are not designed to answer this question. CBA,as described below, is about social well-being and resources, not aboutfiscal impacts. This is an important point that is often overlooked and mustbe considered. Within this report, we emphasize the discrepancy betweenwhat cost-benefit researchers think they are producing (i.e., estimates ofsocietal well-being) and what policy stakeholders think they are receiving(i.e., advice about fiscal savings).The steps of a cost-benefit analysis. CBA can be thought of asprogressing through four steps:1. Choose the population.2. Select potential impacts.3. Consider how the program might change well-being.4. Determine how society values these changes.It is important to keep in mind that the final goal of a CBA is to estimatethe social benefit (or cost) of a program. In the following paragraphs, wedescribe the conceptual steps and then offer an applied framework. Finally,we show how these steps work in practice through NIJ’s MADCE.1. Choose the population. The first step of a CBA is to determine thepopulation you are interested in (called the “standing” of the study). Inbrief, the study’s standing is the group whose well-being is changed by anew policy or practice. Stated another way, the standing is the populationwhose costs and benefits are counted. A study’s standing might be allof society, all of society excluding the program participants, or all taxpaying citizens. Choosing which group has standing is a value-baseddecision that depends on the nature of the program, the analysis, and thedecision-makers or stakeholders. For example, a CBA of a mandatory jobtraining program for recipients of government assistance generally includesprogram participants in its standing, whereas a CBA of sentencing policygenerally does not include prisoners in its standing (although it could). Inpractice, the selection of the standing in the aforementioned examplesNational Institute of Justice NIJ.gov

RESEARCH IN BRIEF9means that one cost of the job training program would be the value of thetime that clients give up to participate in training (economists call this the“opportunity cost” of participants’ time), whereas a sentencing CBA wouldnot include the opportunity cost of the prisoners’ time.2. Select potential impacts. Select the potential impacts to include inthe analysis. First, consider what might have changed as a result of theprogram. In a criminal justice context, potential impacts often meanchanges in behavior (e.g., employment, criminal offenses) or resourcesused (e.g., police time, jail beds, court hearings). Think about what effectsthe program may have had, identify the impacts you can plausibly measure,and estimate the size of the changes that the program caused (if any). Thisstep is the reason that a CBA relies on a strong impact evaluation. Withoutan impact evaluation, estimating the program’s effects is impossible, and,thus, there are no effects to value. Economists sometimes say that anevaluation is “well identified” if it convincingly isolates the causal impactsof the program.3. Consider how the program might change well-being. Consider howthe program’s effects might have changed the well-being (either positivelyor negatively) of someone in the standing. For instance, a program thatincreases meetings with a probation officer might decrease the timethat the officer has to work with other clients. A program that improvesparticipants’ educational outcomes might lead participants to makegreater contributions to society through employment. Regardless,this step translates the program’s impacts into social well-being.i4. Determine how society values these changes. Find informationeither from within or outside of the evaluation to determine how societyvalues these changes. For instance, ask, “How much does society valuea probation officer’s time?” Or, “How much does society value more andbetter education?” Keep in mind that the answers to these questions havenothing to do with the analysts’ beliefs about how much these issuesEconomists usually call this “social welfare” or just “welfare.” To avoid confusion with theunrelated government assistance programs, we often say “well-being” instead, even thoughresearchers more commonly use the term “welfare.”iNational Institute of Justice NIJ.gov

10Cost-Benefit Analysis: A Guide for Drug Courts and Other Criminal Justice Programsshould be valued; rather, the analyst must use existing data to estimate,based on observed behavior, how society does in fact value these changes.Steps 3 and 4 could be considered the key contributions to — and the keychallenges of — conducting a CBA.Implementing the conceptual framework. To implement theconceptual framework, we must “ground” our thinking: First, we think ofeach cost (or benefit) as a price multiplied by a quantity. Because a cost issimply a negative benefit, we tend to use the terms “costs” and “benefits”interchangeably. Using the terms interchangeably allows us to illustratethat both costs and benefits measure how the program affected socialwell-being (either positively or negatively) and that costs and benefitsare not fundamentally different concepts.The quantities used in CBA are the main project inputs (e.g., hours oftraining) and the outcomes of interest (e.g., number of arrests, number oftreatment episodes, hours of employment). These quantities are drawnfrom the impact analysis, which must include comparable information forthe comparison group. The prices are the way that well-being is affected(e.g., resources used per arrest/treatment episode, social value contributedby employment). This information is drawn from surveys, observations,prior research and a variety of other sources of information. We discusssome examples in the next section.After deciding which impacts to include, the researchers determine themeasure (quantity) and value (price) of the impacts and then multiply thequantity (e.g., number of additional drug treatment episodes) by the price(e.g., cost of a drug treatment episode) to get the cost (e.g., additionaldrug treatment episodes). The researchers then can add together a rangeof different costs and benefits to create a measure of “net benefits.” Netbenefits refers to the benefits minus the costs. For instance, if a programcosts 50 per participant but yields 150 in social welfare per participant,on average, then we say the program yields 100 in net benefits (perparticipant). The resulting net benefits yield an estimate of how participantsimproved or harmed society, combining an array of different types ofimpacts.National Institute of Justice NIJ.gov

RESEARCH IN BRIEF11The key question is whether the net benefits to society are greater for thetreatment group (i.e., program participants) than for the comparison group.If so, this finding suggests that the program improved societal well-being,either by reducing the harm that participants would have done to societywithout the program (i.e., decreasing costs) or by increasing the value ofparticipants’ societal contributions (i.e., increasing benefits). Because theresearchers estimated the quantities using rigorous methods (as developedin the impact analysis), we have some confidence that the program itselfcaused the difference.Cost-Benefit Analysis in Action: NIJ’s MADCEIn this section, we illustrate the general principles previously describedwith a practical example, relying on the CBA component of NIJ’s MADCE.We discuss the evaluation of the MADCE only briefly. For more informationabout NIJ’s MADCE, readers may access NIJ’s website, which includeslinks to a number of related publications (search NIJ.gov, keyword:MADCE).In fiscal year 2003, NIJ awarded a grant to the Urban Institute for amultisite process, impact and cost evaluation of adult drug courts inpartnership with the Center for Court Innovation and RTI International. Thestudy included 23 drug courts in eight states, with the comparison groupdrawn from six comparison groups where drug court access was limited.Overall, 1,787 individuals participated in the study, with about two-thirdsof them in the treatment group. Study participants were interviewed at thetime they enrolled in drug court (or would have enrolled for the comparisongroup) and then were interviewed again both six months and 18 monthslater. At the 18-month interview, the study participants also received adrug test. Finally, at 24 months, the researchers collected official recordsdescribing participants’ contact with the criminal justice system. Theresearchers also collected cost data from interviews, document reviewand direct observation of court practices. They analyzed the data usingstatistical procedures that accounted for differences between peoplebased on a large list of personal characteristics and site-specific effects,thereby effectively isolating the impact of drug court participation on eachindividual’s o

combining a range of impacts. Consider a law that bans smoking in restaurants. Such a law has several positive effects (called benefits), including improved health of restaurant staff and diners as well as a more pleasant atmosphere for nonsmokers. The same law, however, also has some negative impacts