Public Investment and the Risk Premium for Equity

18 Pages Posted: 12 Apr 2003

See all articles by Simon Grant

Simon Grant

Rice University - Department of Economics; Australian National University

John Quiggin

University of Queensland - Business School

Abstract

Analysis of the equity premium puzzle has focused on private-sector capital markets. However, the existence of an anomalous equity premium raises important issues in the evaluation of public-sector investment projects. These issues are explored below. We begin by formalizing the argument that an equity premium may arise from uninsurable systematic risk in labour income, and show that, other things being equal, increases in public ownership of equity will improve welfare, up to the point where the equity premium is eliminated. Finally, we consider policy implications and the optimal extent of public ownership.

Suggested Citation

Grant, Simon Harold and Quiggin, John, Public Investment and the Risk Premium for Equity. Available at SSRN: https://ssrn.com/abstract=388212

Simon Harold Grant (Contact Author)

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States
713-348-3332 (Phone)
713-348-6329 (Fax)

Australian National University ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia
61-2-6125-4602 (Phone)
61-2-6125-3051 (Fax)

John Quiggin

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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