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

IMF Working Paper 2023/056

25 Pages Posted: 18 Oct 2015 Last revised: 8 May 2023

See all articles by Luciano Greco

Luciano Greco

Padua University - Department of Economics and Management

Marian Moszoro

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

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Date Written: March 2023

Abstract

The economic debate underlines the reasons why discount rates of infrastructure projects should be similar, regardless the public or private source of financing, during the forecast period when flows are risky but predictable. In contrast, we show that the incompleteness of contracts between governments and private firms beyond the forecast period (i.e., when flows of net social benefits are state-contingent) entails expected terminal values that are systematically larger under government rather than private financing. This effect provides a new rationale for applying a lower discount rate in the assessment of projects under public financing as compared to private financing.

Keywords: Social discount rate, public utilities, private financing of infrastructures, public-private partnerships

JEL Classification: H43, L32, L97

Suggested Citation

Greco, Luciano and Moszoro, Marian W., Public versus Private Cost of Capital with State-Contingent Terminal Value (March 2023). IMF Working Paper 2023/056, Available at SSRN: https://ssrn.com/abstract=2674668 or http://dx.doi.org/10.2139/ssrn.2674668

Luciano Greco

Padua University - Department of Economics and Management ( email )

via Giustiniani 2
Padua, Padua 35128
Italy

Marian W. Moszoro (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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

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