Optimal Discount Rates for Government Projects

42 Pages Posted: 26 Dec 2008 Last revised: 1 Dec 2010

Date Written: September 9, 2009

Abstract

Project selection based on the net-present-value can be optimal only if the discount rate is optimal. The optimal discount rate for a government project can be a riskfree rate, a market rate, or an adjusted market rate, depending on circumstances. This paper clarifies the conditions for each case. A more novel contribution of this paper is to derive comparable market rates for different intervention methods and subsidy rates. The comparable market rate varies across intervention methods and changes with the subsidy rate.

Keywords: Discount Rates, Government Projects, Cost-Benefit Analysis, Investment Efficiency, Government Subsidies

JEL Classification: H43, H24, G11

Suggested Citation

Park, Sangkyun, Optimal Discount Rates for Government Projects (September 9, 2009). Available at SSRN: https://ssrn.com/abstract=1320208 or http://dx.doi.org/10.2139/ssrn.1320208

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