Optimal Discount Rates for Government Projects
42 Pages Posted: 26 Dec 2008 Last revised: 1 Dec 2010
Date Written: September 9, 2009
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: Suggested Citation