Public versus Private Cost of Capital with State-Contingent Terminal Value
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Summary:
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.
Series:
Working Paper No. 2023/056
Frequency:
regular
English
Publication Date:
March 10, 2023
ISBN/ISSN:
9798400235276/1018-5941
Stock No:
WPIEA2023056
Pages:
26
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