IDEAS home Printed from https://ideas.repec.org/a/kap/transp/v46y2019i1d10.1007_s11116-017-9780-4.html
   My bibliography  Save this article

Time-declining risk-adjusted social discount rates for transport infrastructure planning

Author

Listed:
  • Kathrin Goldmann

    (University of Münster)

Abstract

This paper proposes a social discount rate for transport infrastructure project evaluation in Germany that accounts for production efficiency, systematic traffic demand risk, as well as increasing uncertainty in the long-run. The systematic risk in infrastructure planning is measured by the sensitivity of transport volume towards GDP using cointegration analysis. In contrast to the only existing application of this model in transport economics, in this paper the systematic risk for freight transport projects is substantially higher than for passenger transport projects. Due to different systematic risk patterns, the discount rates for freight and passenger transport projects should differ as well, with the former being equal to approximately 3.5% and declining to 2.7% after 50 years, and the latter ranging between 2.0% and the risk-free rate of 1.3%. This paper focuses especially on the econometric challenges of the CAPM-like estimation of systematic risk in public transport infrastructure project assessment and is at the same time the first application to German data.

Suggested Citation

  • Kathrin Goldmann, 2019. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Transportation, Springer, vol. 46(1), pages 17-34, February.
  • Handle: RePEc:kap:transp:v:46:y:2019:i:1:d:10.1007_s11116-017-9780-4
    DOI: 10.1007/s11116-017-9780-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11116-017-9780-4
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s11116-017-9780-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christian Gollier & Phoebe Koundouri & Theologos Pantelidis, 2008. "Declining discount rates: Economic justifications and implications for long-run policy [‘Regime switches in interest rates’]," Economic Policy, CEPR;CES;MSH, vol. 23(56), pages 758-795.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Ramanathan, R., 2001. "The long-run behaviour of transport performance in India: a cointegration approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 35(4), pages 309-320, May.
    4. Christian Gollier, 2011. "On the Underestimation of the Precautionary Effect in Discounting*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 36(2), pages 95-111, December.
    5. Hepburn, Cameron & Koundouri, Phoebe & Panopoulou, Ekaterini & Pantelidis, Theologos, 2009. "Social discounting under uncertainty: A cross-country comparison," Journal of Environmental Economics and Management, Elsevier, vol. 57(2), pages 140-150, March.
    6. Gollier, Christian, 2016. "Evaluation of long-dated assets: The role of parameter uncertainty," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 66-83.
    7. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    8. Søren Johansen, 2007. "Correlation, regression, and cointegration of nonstationary economic time series," CREATES Research Papers 2007-35, Department of Economics and Business Economics, Aarhus University.
    9. Krüger, Niclas A., 2012. "Estimating traffic demand risk – A multiscale analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(10), pages 1741-1751.
    10. Kenneth J. Arrow & Maureen L. Cropper & Christian Gollier & Ben Groom & Geoffrey M. Heal & Richard G. Newell & William D. Nordhaus & Robert S. Pindyck & William A. Pizer & Paul R. Portney & Thomas Ste, 2014. "Editor's Choice Should Governments Use a Declining Discount Rate in Project Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 145-163.
    11. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    12. Hultkrantz, Lars & A. Krüger, Niclas & Mantalos, Panagiotis, 2014. "Risk-adjusted long-term social rates of discount for transportation infrastructure investment," Research in Transportation Economics, Elsevier, vol. 47(C), pages 70-81.
    13. Hultkrantz, Lars & Mantalos, Panagiotis, 2018. "Hedging with trees: Tail-hedge discounting of long-term forestry returns," Journal of Forest Economics, Elsevier, vol. 30(C), pages 52-57.
    14. Martin L. Weitzman, 2012. "Rare Disasters, Tail-Hedged Investments, and Risk-Adjusted Discount Rates," NBER Working Papers 18496, National Bureau of Economic Research, Inc.
    15. Sterner, Thomas & Tol, Richard S. J. & Weitzman, Martin L. & Pizer, William A. & Portney, Paul R. & Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newe, 2014. "Should Governments Use a Declining Discount Rate in Project Analysis?," Scholarly Articles 33373349, Harvard University Department of Economics.
    16. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    17. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    18. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    19. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    20. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    21. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    22. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    23. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
    24. Dixit, Avinash & Williamson, Amy, 1989. "Risk - adjusted rates of return for project appraisal," Policy Research Working Paper Series 290, The World Bank.
    25. Christian Gollier, 2011. "On the Underestimation of the Precautionary Effect in Discounting," CESifo Working Paper Series 3536, CESifo.
    26. James G. MacKinnon, 2010. "Critical Values For Cointegration Tests," Working Paper 1227, Economics Department, Queen's University.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Catalão, Francisco Pinheiro & Cruz, Carlos Oliveira & Sarmento, Joaquim Miranda, 2019. "The determinants of cost deviations and overruns in transport projects, an endogenous models approach," Transport Policy, Elsevier, vol. 74(C), pages 224-238.
    2. Serban Raicu & Mihaela Popa & Dorinela Costescu, 2022. "Uncertainties Influencing Transportation System Performances," Sustainability, MDPI, vol. 14(13), pages 1-15, June.
    3. Zhang, Linling & Yuan, Jinjian & Gao, Xinyu & Jiang, Dawei, 2021. "Public transportation development decision-making under public participation: A large-scale group decision-making method based on fuzzy preference relations," Technological Forecasting and Social Change, Elsevier, vol. 172(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hultkrantz, Lars & A. Krüger, Niclas & Mantalos, Panagiotis, 2014. "Risk-adjusted long-term social rates of discount for transportation infrastructure investment," Research in Transportation Economics, Elsevier, vol. 47(C), pages 70-81.
    2. Freeman, Mark C. & Groom, Ben & Panopoulou, Ekaterini & Pantelidis, Theologos, 2015. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Journal of Environmental Economics and Management, Elsevier, vol. 73(C), pages 32-49.
    3. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    4. Gollier, Christian & Zheng, Jiakun & van der Ploeg, Frederick, 2022. "The Discounting Premium Puzzle: Survey evidence from professional economists," TSE Working Papers 22-1345, Toulouse School of Economics (TSE).
    5. Gollier, Christian & van der Ploeg, Frederick & Zheng, Jiakun, 2023. "The discounting premium puzzle: Survey evidence from professional economists," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).
    6. Gollier, Christian & van der Ploeg, Frederick & Zheng, Jiakun, 2023. "The discounting premium puzzle: Survey evidence from professional economists," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).
    7. Chen, Ming-Hsiang, 2003. "Risk and return: CAPM and CCAPM," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 369-393.
    8. Frederick Ploeg, 2021. "Carbon pricing under uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1122-1142, October.
    9. Rick van der Ploeg, 2020. "Discounting and Climate Policy," CESifo Working Paper Series 8441, CESifo.
    10. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    11. Tamai, Toshiki, 2023. "The rate of discount on public investments with future bias in an altruistic overlapping generations model," European Journal of Political Economy, Elsevier, vol. 79(C).
    12. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    13. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021.
    14. Hultkrantz, Lars & Mantalos, Panagiotis, 2018. "Hedging with trees: Tail-hedge discounting of long-term forestry returns," Journal of Forest Economics, Elsevier, vol. 30(C), pages 52-57.
    15. Michael D. Bauer & Glenn D. Rudebusch, 2023. "The Rising Cost of Climate Change: Evidence from the Bond Market," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1255-1270, September.
    16. John D. Levendis, 2018. "Time Series Econometrics," Springer Texts in Business and Economics, Springer, number 978-3-319-98282-3, June.
    17. Lars Hultkrantz, 2021. "Discounting in economic evaluation of healthcare interventions: what about the risk term?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(3), pages 357-363, April.
    18. Julliard, Christian, 2007. "Labor income risk and asset returns," LSE Research Online Documents on Economics 4811, London School of Economics and Political Science, LSE Library.
    19. Zhang, Han, 2021. "An inflation-based ICAPM in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    20. Lanlan Luo & Shou Chen & Ziran Zou, 2020. "Determining the Generalized Discount Rate for Risky Projects," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(1), pages 143-158, September.

    More about this item

    Keywords

    Social discount rate; Traffic demand risk; Time series analysis; Infrastructure planning; Cost-benefit analysis;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:transp:v:46:y:2019:i:1:d:10.1007_s11116-017-9780-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.