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Public Investment and the Risk Premium for Equity

Author

Listed:
  • Simon Grant

    (Tilburg University)

  • John Quiggin

    (Australian National University)

Abstract

Analysis of the equity premium puzzle has focused on private--sector capital markets. However, the existence of an anomalous equity premium raises important issues in the evaluation of public--sector investment projects. These issues are explored below. We begin by formalizing the argument that an equity premium may arise from uninsurable systematic risk in labour income, and show that, other things being equal, increases in public ownership of equity will improve welfare, up to the point where the equity premium is eliminated. Finally, we consider policy implications and the optimal extent of public ownership. Copyright The London School of Economics and Political Science 2003

Suggested Citation

  • Simon Grant & John Quiggin, 2003. "Public Investment and the Risk Premium for Equity," Economica, London School of Economics and Political Science, vol. 70(277), pages 1-18, February.
  • Handle: RePEc:bla:econom:v:70:y:2003:i:277:p:1-18
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    Citations

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    Cited by:

    1. John Quiggin, 2009. "Six Refuted Doctrines," Economic Papers, The Economic Society of Australia, vol. 28(3), pages 239-248, September.
    2. R. R. Officer, 2004. "Public or Private: Where Government Should Draw the Line," Australian Accounting Review, CPA Australia, vol. 14(33), pages 22-26, July.
    3. Heinzel, Christoph, 2008. "Implications of diverging social and private discount rates for investments in the German power industry: a new case for nuclear energy?," Dresden Discussion Paper Series in Economics 03/08, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    4. Grant Simon & Quiggin John, 2005. "What Does the Equity Premium Mean?," The Economists' Voice, De Gruyter, vol. 2(4), pages 1-7, September.
    5. John Quiggin, 2003. "Looking back on microeconomic reform: a skeptical viewpoint," Australian Public Policy Program Working Papers WPP03_1, Risk and Sustainable Management Group, University of Queensland, revised Aug 2003.
    6. John Quiggin, 2010. "Bad Politics Makes Bad Policy: The Case of Queensland's Asset Sales Programme," Economic Papers, The Economic Society of Australia, vol. 29(1), pages 13-22, March.
    7. Mark A. Moore & Anthony E. Boardman & Aidan R. Vining & David L. Weimer & David H. Greenberg, 2004. "“Just give me a number!” Practical values for the social discount rate," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 23(4), pages 789-812.
    8. Vance Martin & G.C. Lim & Esfandiar Maasoumi, 2004. "Discounting The Equity Premium Puzzle," Econometric Society 2004 Australasian Meetings 331, Econometric Society.
    9. Grant, Simon & Quiggin, John, 2003. "The Risk Premium for Equity: Implicatiosn for Resource Allocation, Welfare adn Policy," Working Papers 2003-14, Rice University, Department of Economics.
    10. 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.
    11. Ross Guest, 2010. "The Proposed Privatisation of Queensland Motorways," Economic Papers, The Economic Society of Australia, vol. 29(1), pages 23-33, March.
    12. John Quiggin, 2006. "Repurchase of renewal rights: a policy option for the National Water Initiative ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(3), pages 425-435, September.
    13. Bruno CRUZ & Aude POMMERET, 2003. "Public capital and private investment, a real option approach," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.10, Université de Lausanne, Faculté des HEC, DEEP.
    14. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
    15. repec:eee:juipol:v:48:y:2017:i:c:p:210-218 is not listed on IDEAS
    16. Simon Grant & John Quiggin, 2002. "The Risk Premium for Equity: Implications for the Proposed Diversification of the Social Security Fund," American Economic Review, American Economic Association, vol. 92(4), pages 1104-1115, September.
    17. John Quiggin, 2003. "Evaluating Megaprojects: Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter, Megaprojects and Risk: An Anatomy of Ambition, Cambridge University Press, Cambridge, 2003," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 10(4), pages 363-366.
    18. John Quiggin, 2004. "Risk, PPPs AND THE Public Sector Comparator," Australian Accounting Review, CPA Australia, vol. 14(33), pages 51-61, July.
    19. Christoph Heinzel & Ralph Winkler, 2007. "The role of environmental and technology policies in the transition to a low-carbon energy industry," CER-ETH Economics working paper series 07/71, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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