Public Investment as Commitment
Should public assets such as infrastructure, education, and the environment earn the same return as private investments? We consider if time-inconsistent decision-makers can gain from institutions that enforce cost-benefit rules on large projects that influence the economy as a whole. Long-term public investments provide commitment to current preferences, leading to investment biases in such assets. The institutionalized cost-benefit prudence eliminates such biases but we show that this behavioral rule has no general social value: it implements Pareto efficiency if and only if preferences are time-consistent, and decreases welfare otherwise. We find that the long-term cost-benefit prudence is fundamentally about income transfers to the future, implying that efficient behavioral rules should target savings directly rather than the division of current investment resources.
|Date of creation:||2011|
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- Andrew Caplin & John Leahy, 2004.
"The Social Discount Rate,"
Journal of Political Economy,
University of Chicago Press, vol. 112(6), pages 1257-1268, December.
- Andrew Caplin & John Leahy, 2001. "The social discount rate," Discussion Paper / Institute for Empirical Macroeconomics 137, Federal Reserve Bank of Minneapolis.
- Andrew Caplin & John Leahy, 2000. "The Social Discount Rate," NBER Working Papers 7983, National Bureau of Economic Research, Inc.
- Maria Saez-Marti & Jorgen W. Weibull, 2005.
"Discounting and altruism to future decision-makers,"
NajEcon Working Paper Reviews
- Saez-Marti, Maria & Weibull, Jorgen W., 2005. "Discounting and altruism to future decision-makers," Journal of Economic Theory, Elsevier, vol. 122(2), pages 254-266, June.
- Arrow, Kenneth J. & Cropper, Maureen L. & Eads, George C. & Hahn, Robert W. & Lave, Lester B. & Noll, Roger G. & Portney, Paul R. & Russell, Milson & Schmalensee, Richard & Smith, V. Kerry & Stavins, , 1997. "Is there a role for benefit-cost analysis in environmental, health, and safety regulation?," Environment and Development Economics, Cambridge University Press, vol. 2(02), pages 195-221, May.
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