Risk-adjusted long term social rates of discount for transportation infrastructure investment
AbstractWe modify a method recently suggested by Martin Weitzman (2012) for determining a risk-adjusted social discount rate (SDR) term structure consistent with both the (augmented) Ramsey rule and the consumption-based CAPM. Using this approach we estimate SDR for transportation infrastructure investments based on an analysis of correlations between transportation work, split on road and rail, and passenger travel and freight transport, and GDP in Sweden 1950-2011. We show that this can be estimated from two time-series following a random walk with drift, even if they are not co-integrated. Based on current estimates of the risk-free rate and the equity risk premium, we estimate the relevant SDR to be 5-6 percent, possibly somewhat lower for investment in railroads for passenger travel, and only slowly declining within the investment horizon. This is higher than the current rates used in, for instance, Sweden, Germany and the UK.
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Bibliographic InfoPaper provided by Örebro University, School of Business in its series Working Papers with number 2012:14.
Length: 36 pages
Date of creation: 18 Dec 2012
Date of revision:
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Postal: Örebro University School of Business, SE - 701 82 ÖREBRO, Sweden
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Web page: http://www.oru.se/Institutioner/Handelshogskolan-vid-Orebro-universitet/
More information through EDIRC
Ramsey rule; CAPM; cost-benefit;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-TRE-2013-01-07 (Transport Economics)
- NEP-URE-2013-01-07 (Urban & Real Estate Economics)
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