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Risk-adjusted long-term social rates of discount for transportation infrastructure investment

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  • Hultkrantz, Lars
  • A. Krüger, Niclas
  • Mantalos, Panagiotis

Abstract

We modify a method recently suggested by Weitzman (2012, 2013) 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, split between road and rail, and between 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 the variables 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 per cent, 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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:retrec:v:47:y:2014:i:c:p:70-81
    DOI: 10.1016/j.retrec.2014.09.020
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    Cited by:

    1. Andersson, Henrik & Hultkrantz, Lars & Lindberg, Gunnar & Nilsson, Jan-Eric, 2017. "The role of economic analysis for investment priorities in Sweden’s transport sector," Working papers in Transport Economics 2017:12, CTS - Centre for Transport Studies Stockholm (KTH and VTI), revised 23 May 2018.
    2. Kathrin Goldmann, 2017. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Working Papers 22, Institute of Transport Economics, University of Muenster.
    3. Hultkrantz, Lars & Mantalos, Panagiotis, 2016. "Estimating “Gamma” for Tail-hedge Discount Rates When Project Returns Are Co-integrated with GDP," Working Papers 2016:3, Örebro University, School of Business.
    4. repec:eee:foreco:v:30:y:2018:i:c:p:52-57 is not listed on IDEAS

    More about this item

    Keywords

    Cost-benefit analysis; Rate of interest; Term structure; Risk; Ramsey equation;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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