Cost of Capital, Discounting, and Relational Contracting: Endogenous Optimal Return and Duration for Joint Investment Projects

Applied Economics, Volume 43, Issue 30, December 2011, pages 4847-4864

Preg CRG Working Paper, Ecole Polytechnique of Paris, 14 March 2010

EGPA Conference, PSG XII: Public Sector Financial Management, Malta, 2-5 September 2009;

34 Pages Posted: 21 Jan 2009 Last revised: 3 Aug 2012

See all articles by Yuri Biondi

Yuri Biondi

French National Center for Scientific Research (CNRS)

Date Written: March 14, 2010

Abstract

Concession, project-financing and public-private partnership schemes are investment projects that are generally submitted to valuation criteria based on discounted cash flow analysis. The theoretical basis of these valuation criteria are now at issue. Pursuant to recent advances in relational contracting economics and behavioural finance, joint investment projects can be considered as special relational environments where the project’s returns improve on alternative replacement opportunities. This article seeks to bridge the gap between new theories and widely used valuation techniques by providing a generalised approach to investment valuation. The article suggests reasonable valuation criteria that fit these new theoretical developments, including an endogenous optimal duration function that may be integrated into the project’s contractual agreement.

Keywords: discounting, investment decision criteria, capital budgeting, project finance and public private partnerships, endogenous optimal duration, cost of capital for government, value for money

JEL Classification: H43, H50, D61, D70, D90, G31, L20

Suggested Citation

Biondi, Yuri, Cost of Capital, Discounting, and Relational Contracting: Endogenous Optimal Return and Duration for Joint Investment Projects (March 14, 2010). Applied Economics, Volume 43, Issue 30, December 2011, pages 4847-4864; Preg CRG Working Paper, Ecole Polytechnique of Paris, 14 March 2010; EGPA Conference, PSG XII: Public Sector Financial Management, Malta, 2-5 September 2009; . Available at SSRN: https://ssrn.com/abstract=1330587 or http://dx.doi.org/10.2139/ssrn.1330587

Yuri Biondi (Contact Author)

French National Center for Scientific Research (CNRS) ( email )

IRISSO - University Paris Dauphine PSL
Place Marechal Lattre Tassigny
75016 Paris
France

HOME PAGE: http://yuri.biondi.free.fr/

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