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The Multi-Period Cost-Benefit Rule with Mobile Capital and Distorted Labor

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Author Info
Liqun Liu ()
Abstract

Lind (1990) argues that capital mobility should be incorporated into the discussions of the social discount rate. He finds that when labor market distortion is ignored in that context, the appropriate discount rate for both project benefits and costs is the net rate of return, and the gross rate of return does not enter into the rule. Taking into account the labor market distortion, we find that a project’s impacts on government receipts should be incorporated into its evaluation and that costs should be multiplied by a marginal cost of funds (MCF) before being compared with benefits. Although the net rate continues to be the correct discount rate to use, the gross rate enters into the rule by having effects on the project’s receipt impacts and the MCF. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s10797-005-0491-y
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 12 (2005)
Issue (Month): 2 (March)
Pages: 145-158
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Handle: RePEc:kap:itaxpf:v:12:y:2005:i:2:p:145-158

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Related research
Keywords: cost benefit analysis; discount rate; marginal cost of funds; capital mobility;

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  2. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 513-47, June. [Downloadable!] (restricted)
  3. Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," Asia-Pacific Financial Markets, Springer, vol. 11(1), pages 17-29, January. [Downloadable!] (restricted)
  4. David F. Burgess, 1989. "The Social Opportunity Cost of Capital in the Presence of Labour Market Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 245-62, May. [Downloadable!] (restricted)
  5. Pestieau, Pierre M, 1975. "The Role of Taxation in the Determination of the Social Discount Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 362-68, June. [Downloadable!] (restricted)
  6. Mendelsohn, Robert, 1981. "The Choice of Discount Rates for Public Projects," American Economic Review, American Economic Association, vol. 71(1), pages 239-41, March. [Downloadable!] (restricted)
  7. Bradford, David F, 1975. "Constraints on Government Investment Opportunities and the Choice of Discount Rate," American Economic Review, American Economic Association, vol. 65(5), pages 887-99, December. [Downloadable!] (restricted)
  8. Diamond, P A & Mirrlees, James A, 1976. "Private Constant Returns and Public Shadow Prices," Review of Economic Studies, Blackwell Publishing, vol. 43(1), pages 41-47, February. [Downloadable!] (restricted)
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  9. Usher, Dan, 1969. "On the Social Rate of Discount: Comment," American Economic Review, American Economic Association, vol. 59(5), pages 925-29, December. [Downloadable!] (restricted)
  10. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December. [Downloadable!] (restricted)
  11. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March. [Downloadable!] (restricted)
  12. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1707-1718, August. [Downloadable!] (restricted)
  13. Wilson, John D., 1982. "Optimal linear income taxation in the presence of emigration," Journal of Public Economics, Elsevier, vol. 18(3), pages 363-379, August. [Downloadable!] (restricted)
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