Some Thoughts on "A Cost-Benefit Analysis of Accounting for Inflation"; A Discussion of Cost-Benefit Analysis Methodology

Espahbodi and Hendrickson (1986) attempt a cost-benefit analysis of 3 models of accounting for inflation and specific price changes. It is questioned how realistic their assumptions are as to the ways that different resource distributions are achieved. For example, they assume that resources are redistributed between firms by what seems to be a merger process, on the basis of expected profitability. Furthermore, they assume that the acquiring firm will be able to achieve the same social return on the acquired firm's assets as on its own assets. It is argued that the underlying processes by which alternative accounting methods are assumed to create social gains and losses are somewhat unrealistic. This conclusion casts doubt on the reliability of the public policy implications of the results contained in their work. Espahbodi and Hendrickson respond to Stark's comments and expand their earlier work to explore alternative assumptions and procedures that should be considered. In addition, they comment on Stark's extensive discussion on the merger implications of the resource allocation assumption.