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Accounting for systematic risk in benefit-cost analysis: a practical approach

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  • Hansen Jason

    (Naval Postgraduate School – Defense Resources Management Institute, CA, USA)

  • Lipow Jonathan

    (Naval Postgraduate School – Defense Resources Management Institute, CA, USA)

Abstract

Circular A-94 specifies how analysts should discount costs and benefits of government projects, and thus how to account for risk. In this paper, we argue that the methods mandated by A-94 properly account for non-systematic and term risk, but not for systematic risk. A numerical example illustrates how improper accounting for systematic risk produces misleading results and social welfare loss. We conclude by proposing a simple modification of A-94’s procedures that would allow analysts to at least partially account for systematic risk.

Suggested Citation

  • Hansen Jason & Lipow Jonathan, 2013. "Accounting for systematic risk in benefit-cost analysis: a practical approach," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(3), pages 361-373, December.
    • Handle: RePEc:bpj:jbcacn:v:4:y:2013:i:3:p:361-373:n:2
    DOI: 10.1515/jbca-2013-0008
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    References listed on IDEAS

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