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Discount Rates for Public Investment under Uncertainty

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  • Sandmo, Agnar

Abstract

The problem of efficient allocation of capital in a world of uncertainty has played a major role in the debate on the social rate of discount. One view, which has been advanced by Hirshleifer [7, 8] and supported by Diamond [6], is that differences in rates of return on capital in the private sector of the economy reflect differences in riskiness among alternative lines of investment, and that these differences are of normative significance for the allocation of capital in the public sector. Thus, when discounting costs and benefits of a particular type of public investment, the government should take as its discount rate the rate of return on capital in a private industry of similar riskiness. Another view, which counts Samuelson [17] and Vickrey [22] among its supporters, is that because of the extremely large and diversified investment portfolio held by the public sector, the marginal return from public investment as a whole is practically risk free and should be equated to the market rate on riskless bonds. In an important recent contribution Arrow and Lind [2] come to the same conclusion for a somewhat different reason; the total risk carried by the public sector is shared among so many that each individual’s risk burden becomes negligible.
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  • Sandmo, Agnar, 1972. "Discount Rates for Public Investment under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(2), pages 287-302, June.
    • Handle: RePEc:ier:iecrev:v:13:y:1972:i:2:p:287-302
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    Cited by:

    1. Lars Hultkrantz, 2021. "Discounting in economic evaluation of healthcare interventions: what about the risk term?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(3), pages 357-363, April.
    2. Jack Hirshleifer, 1989. "Investment Decision Criteria - Public Decisions," UCLA Economics Working Papers 571, UCLA Department of Economics.
    3. Syed Ahsan & Peter Tsigaris, 1998. "The design of a consumption tax under capital risk," Journal of Economics, Springer, vol. 68(1), pages 53-78, February.
    4. R. Richard Geddes, 2020. "Comment on "A Fair Value Approach to Valuing Public Infrastructure Projects and the Risk Transfer in Public Private Partnerships"," NBER Chapters, in: Economic Analysis and Infrastructure Investment, pages 403-407, National Bureau of Economic Research, Inc.
    5. Agnar Sandmo, 2010. "Uncertainty in the Theory of Public Finance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 35(1), pages 1-18, June.
    6. Michael Falkenheim, 2021. "Governmental Risk Taking Under Market Imperfections: Working Paper 2021-07," Working Papers 57255, Congressional Budget Office.
    7. Jock R. Anderson, 1983. "On Risk Deductions In Public Project Appraisal," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 27(3), pages 231-239, December.
    8. Gollier, Christian, 2021. "The Welfare Cost of Ignoring the Beta," FEEM Working Papers 309916, Fondazione Eni Enrico Mattei (FEEM).
    9. Schindler, Dirk, 2008. "Human Capital, Multiple Income Risk and Social Insurance," Discussion Papers 2008/18, Norwegian School of Economics, Department of Business and Management Science.
    10. Syed Ahsan & Panagiotis Tsigaris, 2002. "Measuring the Social Discount Rate under Uncertainty: A Methodology and Application," CESifo Working Paper Series 824, CESifo.
    11. Vesa Kanniainen & Tuula Lehtonen & Ilkka Mellin, 2013. "Honeybee Economics - Implications for Ecology Policy," CESifo Working Paper Series 4204, CESifo.
    12. Richard B. Howarth, 2003. "Discounting and Uncertainty in Climate Change Policy Analysis," Land Economics, University of Wisconsin Press, vol. 79(3), pages 369-381.
    13. John H. Boyd, 1982. "Eximbank lending: a federal program that costs too much," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 6(Win).
    14. Hepburn, Cameron & Koundouri, Phoebe & Panopoulou, Ekaterini & Pantelidis, Theologos, 2009. "Social discounting under uncertainty: A cross-country comparison," Journal of Environmental Economics and Management, Elsevier, vol. 57(2), pages 140-150, March.
    15. Osmundsen, Petter, 1999. "Risk sharing and incentives in norwegian petroleum extraction," Energy Policy, Elsevier, vol. 27(9), pages 549-555, September.
    16. Carbajal-De-Nova, Carolina & Venegas-Martínez, Francisco, 2019. "On the paradigm shift of asset pricing models, before and after the global financial crisis: a literature review," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 15(29), pages 7-38, Primer se.
    17. Syed M. Ahsan & Panagiotis Tsigaris, 2003. "Choice of Tax Base Revisited: Cash Flow vs. Prepayment Approaches to Consumption Taxation," CESifo Working Paper Series 983, CESifo.
    18. Deborah Lucas & Marvin Phaup, 1975. "The Cost of Risk to the Government and Its Implications for Federal Budgeting," NBER Chapters, in: Measuring and Managing Federal Financial Risk, pages 29-54, National Bureau of Economic Research, Inc.
    19. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1707-1718, August.
    20. Louis Kaplow, 2006. "Discounting Dollars, Discounting Lives: Intergenerational Distributive Justice and Efficiency," NBER Working Papers 12239, National Bureau of Economic Research, Inc.

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