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Cost of capital, discounting and relational contracting: endogenous optimal return and duration for joint investment projects

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  • Y. Biondi

Abstract

Concession, project financing and public-private partnership schemes are investment projects that are generally submitted to valuation criteria based on discounted cash flow analysis. The theoretical basis of these valuation criteria are now at issue. Pursuant to recent advances in relational contracting economics and behavioural finance, joint investment projects can be considered as special relational environments where the project's returns improve on alternative replacement opportunities. This article seeks to bridge the gap between new theories and widely used valuation techniques by providing a generalized approach to investment valuation. This article suggests reasonable valuation criteria that fit these new theoretical developments, including an endogenous optimal duration function that may be integrated into the project's contractual agreement.

Suggested Citation

  • Y. Biondi, 2011. "Cost of capital, discounting and relational contracting: endogenous optimal return and duration for joint investment projects," Applied Economics, Taylor & Francis Journals, vol. 43(30), pages 4847-4864.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:30:p:4847-4864
    DOI: 10.1080/00036846.2010.498362
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    References listed on IDEAS

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    1. Rubinstein, A., 2000. "Is it "Economics and Psychology"?: the Case of Hyperbolic Discounting," Papers 00-21, Tel Aviv.
    2. Yuri Biondi, 2005. "The firm as an Entity: Management, Organization, Accounting," Post-Print halshs-00203036, HAL.
    3. Michael SPACKMAN, 2006. "Social discount rates for the European Union: an overview," Departmental Working Papers 2006-33, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    4. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
    5. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 1997. "Highway Franchising: Pitfalls and Opportunities," American Economic Review, American Economic Association, vol. 87(2), pages 68-72, May.
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    Cited by:

    1. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, vol. 95(5), pages 1369-1385, December.

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