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The public discount rate and the uncertain budgetary flows


  • Ahsan, Syed M.

    (Department of Economics, Copenhagen Business School)

  • Tsigaris, Panagiotis

    (Department of Economics, Copenhagen Business School)


Public investment in infrastructure and the like do not usually yield direct pecuniary returns to the public exchequer. Instead public capital leads to increases in factor productivity in the private economy. This paper argues that government typically shares in the latter gains via the tax-expenditure policies. Consequently the discount rate relevant for the investment is ultimately the same rate, as that required for valuing the future gains. However, it is important to note that these productivity gains are subject to aggregate economic shocks. From the perspectives of a counter factual experiment whereby the risky revenue flows serve as collateral for public borrowing, one may derive the risk discount rate that the capital market would set. This paper applies the above methodology to the United States, uses budget data for the period, 1950-1995, and shows that while the risk discount would typically exceed the risk free rate, it remains well below that facing a private investor. The intuition here is that the portfolio of assets embedded in the state’s revenue claims provides additional diversification than is available through financial markets. Consequently even investors holding well-diversified stock portfolios may legitimately view claims on state revenue as vehicles for further risk shifting.
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  • Ahsan, Syed M. & Tsigaris, Panagiotis, 1998. "The public discount rate and the uncertain budgetary flows," Working Papers 15-1998, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:1998_015

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    References listed on IDEAS

    1. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    2. Erik Berglöf & Mike Burkart, 2003. "European takeover regulation," Economic Policy, CEPR;CES;MSH, vol. 18(36), pages 171-213, April.
    3. repec:hrv:faseco:30747162 is not listed on IDEAS
    4. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    5. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)


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