Public versus Private Cost of Capital with State-Contingent Terminal Value

25 Pages Posted: 18 Oct 2015 Last revised: 26 Jan 2016

See all articles by Marian W. Moszoro

Marian W. Moszoro

George Mason University - Department of Economics; George Mason University - Interdisciplinary Center for Economic Science (ICES); Warsaw School of Economics (SGH)

Date Written: January 25, 2016

Abstract

The choice of infrastructure delivery through public versus private provision is driven by investment and operational efficiency, and cost of capital differentials. While the first two factors are measurable --- albeit with mixed results --- the appropriate discount rate instigates methodological discussions. Efficient market hypothesis supporters propose a single discount rate, independently of the source of financing; welfare economists advocate for a lower discount rate for public-sector cash flows. I revisit this discussion with attention to state-contingent terminal value --- including regulatory discretion, expropriation, risk transfer schemes, limited liability, multilevel administrations, and catastrophic events --- and provide an empirical test of lower price volatility for government-sponsored enterprises. Finally, I propose an integrated approach with a dual discount rate treat: a common discount rate for predictable cash flows and divorced discount rates for terminal cash flows.

Keywords: Social Discount Rate, Cost of Capital, Utilities, Public-Private Partnerships

JEL Classification: D78, L32, L51, L97, L98

Suggested Citation

Moszoro, Marian W., Public versus Private Cost of Capital with State-Contingent Terminal Value (January 25, 2016). Available at SSRN: https://ssrn.com/abstract=2674668 or http://dx.doi.org/10.2139/ssrn.2674668

Marian W. Moszoro (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

HOME PAGE: http://economics.gmu.edu/people/mmoszoro

George Mason University - Interdisciplinary Center for Economic Science (ICES) ( email )

400P Truland Building
George Mason University
Fairfax, VA 22030
United States

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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