Abstract

http://ssrn.com/abstract=390110
 
 

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Risk and the Discount Rate for Public Investment


Martin J. Bailey


Martin J. Bailey (Deceased)

Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)


M.C. Jense, STUDIES IN THE THEORY OF CAPITAL MARKETS, Praeger Publishers, 1972

Abstract:     
This paper enlarges upon some recent work regarding the appropriate discount rate for public projects and, in particular, shows more fully why risk should enter into the calculation. Indeed, we argue that efficient allocation of risk bearing is usually more difficult for government projects than it is for private ones. Therefore, if anything, the allowance for risk should be greater for government projects than it is for other-wise comparable private ones (assuming no distortions from competitive equilibrium). We then outline the implications of recent mean-variance asset pricing models for the project evaluation framework, providing an integration of the treat-ment of risk with Harberger's (1968) solution to the distortion problem. In the context of this theory we also offer specific arguments on the risks of different types mid classes of govern-ment projects.

Number of Pages in PDF File: 35

Keywords: risk, risk bearing, mean-variance asset pricing model, public investment, discount rate, riskless investment, diversification, distortion

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Date posted: December 8, 2005  

Suggested Citation

Bailey, Martin J. and Jensen, Michael C., Risk and the Discount Rate for Public Investment. M.C. Jense, STUDIES IN THE THEORY OF CAPITAL MARKETS, Praeger Publishers, 1972. Available at SSRN: http://ssrn.com/abstract=390110 or http://dx.doi.org/10.2139/ssrn.390110

Contact Information

Martin J. Bailey
Martin J. Bailey (Deceased)
Michael C. Jensen (Contact Author)
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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