Public versus Private Cost of Capital

33 Pages Posted: 21 Jun 2017 Last revised: 1 Aug 2017

See all articles by Marian W. Moszoro

Marian W. 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)

Date Written: June 29, 2017

Abstract

Should projects funded with taxpayer money be discounted at a lower rate than privately funded projects? I analyze the discount rate applied to long-term cash flows in public (in-house) versus private (contracting out) provision of public goods subject to regulatory burdens. I develop a model and provide evidence of lower cash flow volatility for government-sponsored enterprises when tail risks materialize. Finally, I propose a dual treat: a common (market) discount rate for cash flows during the forecast period and divorced---public lower than private---discount rates for cash flows embedded in the terminal value.

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

JEL Classification: D78, H43, L32, L97, L98

Suggested Citation

Moszoro, Marian W., Public versus Private Cost of Capital (June 29, 2017). GMU Working Paper in Economics No. 17-25, Available at SSRN: https://ssrn.com/abstract=2989840 or http://dx.doi.org/10.2139/ssrn.2989840

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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