THE LIMITS OF THE ECONOMIC VALUE IN MEASURING THE PERFORMANCE

OF SOCIAL ENTREPRISES

Michel Marée & Sybille Mertens

HEC-ULg, Centre d’Economie Sociale

Liège, 3-4 March 2011

Introduction• Question : How can we compare performance of various types of

providers ?

• Paper :

• Synthetic analysis of the various methods used to measure global performance, including non-market dimensions of performance

• Focus : limits of the economic value

One example

• Dimensions of performance of a work integration social enterprise active in the area of waste collection and recycling

Market dimensions Non-market dimensions

Output Sales of recycled products IntegrationRecycling activity

Direct impacts Utility of buyers (buying the products)

Increase in the employabilityWaste collection

Indirect impacts Protection of the environmentSocial cohesion

Dimensions of performance

Output (Achievements)

Direct impacts (outcomes)

on direct beneficiaries

Indirect impact (externalities) on

indirect beneficiaries (including collective

impacts)

Market

dimension

Non-market

dimension

The measures of nonmarket production

Approaches Accounting measures Resources used

Economic measures Optimization

Theoretical reference

National accounting

CEA

CBA: monetary valuation

(Welfare analysis)

Tools

Accounting value

cost-based approach revenues-based approach

Indicators

+ qualitative analysis

Indirect

monetary value

Economic value (WTP)

revealed preferences expressed preferences (CVM)

Accounting measure• Cost-based approach (underestimation)

• Revenue-based approach (underestimation)

The measures of nonmarket production

Approaches Accounting measures Resources used

Economic measures Optimization

Theoretical reference

National accounting

CEA

CBA: monetary valuation

(Welfare analysis)

Tools

Accounting value

cost-based approach revenues-based approach

Indicators

+ qualitative analysis

Indirect

monetary value

Economic value (WTP)

revealed preferences expressed preferences (CVM)

Cost-effectiveness analysis• Physical indicators (+ qualitative analysis)

• Limits :

• Partial character of the indicators

• Weigthing problems

• Specific character of the indicators

• Requirement for interdisciplinary work

• Existence of intangible impacts

The measures of nonmarket production

Approaches Accounting measures Resources used

Economic measures Optimization

Theoretical reference

National accounting

CEA

CBA: monetary valuation

(Welfare analysis)

Tools

Accounting value

cost-based approach revenues-based approach

Indicators

+ qualitative analysis

Indirect

monetary value

Economic value (WTP)

revealed preferences expressed preferences (CVM)

Cost-benefit analysis• Comparing the costs and the benefits

• NAV = (Bi –Ci)/(1+r)i with i = 0,…,n

• Two techniques :

• Indirect monetary value

• Economic value (Willingness to pay- WTP)

• Revealed preferences

• Expressed preferences (Contingent valuation Method-CVM)

Cost-benefit analysis• Advantages :

• Rigorous, WTP explained by the consumer theory

• Objective (based on individual’s preferences)

• Global (covering all dimensions)

• Consistent with the evaluation of market goods

• Limits :

• Technical

• Methodological : embedding effect, scope effect , sequence effect and warm-glow effect

• Conceptual

Conceptual limits

EV = SVi

for i = 1,…,N, where N is the number of persons concerned and

SVi = V(Ui) = WTPi,

• Hypothesis :

• Max of the utility function

• Monetary measures of the variation in utility

• Assimilation of utility to value (welfare approach)

• Economic value = sum of individual subjective values

Conceptual limits

Conceptual basis of economic value

Limits

1 Maximization of the utility function Bounded rationality of the consumer => indeterminate preferences

2 Monetary measure of variations in utility

Bounded rationality of the consumer => indeterminate utility variations

3 Assimilation of utility to welfare Existence of non-use values => not reducible to variations in welfare

4 Economic value as the sum of individual subjective values

"Bounded awareness" of the consumer => existence of so-called "socially constructed values", distinct from the sum of the individual subjective values

5 Individual goals assumed to be expressed (amorality of the model)

Particular perception of value (paradigm of individualism)

Conclusion • CBA with CVM :

• Too ambitious

• Limits of economics

• CEA

• Social construction

• Interdisciplinary work

• Evolutive work

Contacts

Centre d’Economie Sociale – HEC-ULg

www.ces.ulg.ac.be

+ 32 4 366 27 51