Specifically, World Bank (1995) noted that the sensitivity analysis did not fully capture likely risks. It lacked a consideration of the risk of delays in implementation or achievement of project benefits associated with institutional reforms. The report noted that neglect of this risk in the analyses imparts an upward bias to ERRs at appraisal and is a major cause of the gap between appraisal and completion ERRs. This paper therefore draws on this conclusion to define a project specific measure of the quality of economic analysis based on the discrepancy between ERRs estimated at appraisal and completion.

The current paper contributes to the literature on the determinants of project performance in the following ways. First, to our knowledge it is the first to use the IEG data set on project exits to link proxies for the quality of project economic analysis to project performance. Second, it exploits the difference between the estimated economic rate of return (ERR) at appraisal and completion as an additional measure of quality that is linked to project performance. The methodological approach adjusts for optimism bias and risks arising from assumptions made about trends in prices and economic growth rates, as well as both country and project level effects.

# 3. Methodology

This section outlines the approach for examining the links between the quality of economic analysis and project performance. It also examines the correlates of the quality of economic analysis. The paper uses regression analysis and draws from the functional forms used by Denizer et al. The quality of project economic analysis (EA) is defined in terms of whether a particular project has estimated a rate of return both at appraisal and completion; and the discrepancy or dispersion between ERR estimates at appraisal and completion, as follows:

- Aj =  1 if an economic rate of return (ERR) has been reported both in the Project Appraisal Document (PAD) and the Implementation Completion Report (ICR); it is 0 otherwise.  The presence of an estimated ERR in both the PAD and ICR is used as a proxy to indicate that more attention has been put toward analyzing the economic performance of the project than would be the case if no ERR had been estimated, or if an ERR was reported only in the PAD or ICR.  The implication is that there has been attention to ensuring that the needed information is available to conduct the EA in a timely fashion.

- Dj = The absolute percentage change between ERR estimated at appraisal and ERR estimated at completion.  It is postulated that appropriate assumptions and proper attention to risks and sensitivity analysis should yield ERRs or expected ERRs that are close in estimated levels between the PAD and ICR.  The implication being that an analysis of the expected impact of risks on the estimated ERR should also inform project design, monitoring and implementation and that this may contribute to improved risk management and better project performance.

The above measures are linked to project performance (Pj and Sj) using regressions that control for country, project and task team level variables that may also affect project performance. Specifically, project performance is defined as a function of the quality of economic analysis (Aj or Dj), controlling for project and country characteristics: Project performance (Pj or Sj) = f (quality of project economic analysis, Xj, Lj, Cj, Tj).

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