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Valuation of Government Policies and Projects


  • Deborah Lucas

    () (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)


Governments play a central role in the allocation of capital and risk in the economy. Evaluating the cost to taxpayers of government investments requires an assumption about the government's cost of capital. Governments often take their borrowing rate to be their cost of capital, which implicitly treats the market risk associated with their activities as having no cost to taxpayers. This article reviews the theoretical and practical rationale for treating market risk as a cost to governments, presents an interpretive review of the growing literature that applies the concepts and tools of modern finance to evaluating the costs of government policies and projects, and suggests directions for future research. Examples considered include deposit insurance, Fannie Mae and Freddie Mac, the Federal Reserve's emergency lending facilities, student loans, real infrastructure investments, and public pension plans.

Suggested Citation

  • Deborah Lucas, 2012. "Valuation of Government Policies and Projects," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 39-58, October.
  • Handle: RePEc:anr:refeco:v:4:y:2012:p:39-58

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    Cited by:

    1. Samuel G. Hanson & David S. Scharfstein & Adi Sunderam, 2016. "Fiscal Risk and the Portfolio of Government Programs," NBER Working Papers 22763, National Bureau of Economic Research, Inc.
    2. Deborah Lucas, 2016. "Credit Policy as Fiscal Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(1 (Spring), pages 1-57.
    3. repec:eee:macchp:v2-2493 is not listed on IDEAS

    More about this item


    asset pricing; cost of capital; government guarantees; social discount rate;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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