Public Investment as Commitment
AbstractShould public assets such as infrastructure, education, and the environment earn the same return as private investments? We consider if time-inconsistent decision-makers can gain from institutions that enforce cost-benefit rules on large projects that influence the economy as a whole. Long-term public investments provide commitment to current preferences, leading to investment biases in such assets. The institutionalized cost-benefit prudence eliminates such biases but we show that this behavioral rule has no general social value: it implements Pareto efficiency if and only if preferences are time-consistent, and decreases welfare otherwise. We find that the long-term cost-benefit prudence is fundamentally about income transfers to the future, implying that efficient behavioral rules should target savings directly rather than the division of current investment resources.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3330.
Date of creation: 2011
Date of revision:
public investments; cost-benefit analysis; inconsistent preferences;
Find related papers by JEL classification:
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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