Social discounting and the equity premium

Michael Spackman

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: There has been a forty-year divide in economics on the relevance to public funding of the equity premium (in particular, today, the consumption CAPM). The costs and benefits of public spending are often correlated with income, but conventional neoclassical analysis, applied by many governments, suggests that the cost of this systematic risk in publicly funded activities is usually trivial. On the other hand, it is often asserted that equity market premiums, which are very much higher than would be estimated from neoclassical analysis (the equity premium ‘puzzle’), should apply also to public funding. This paper, which aims largely to help government administrations, assembles a picture of the evolving research on and understanding of the premium. Public funding does incur social costs arising from the associated tax burden. There is, however, no evidence to support assertions that the equity risk premium anomaly is relevant to public funding. In any case, the cost of systematic risk in the benefits of public funding does not fall as an annual percentage rate to financiers, but as an absolute cost to public service beneficiaries.

Keywords: climate change legislation; climate policy; carbon leakage; pollution havens; production emissions; consumption emissions; Centre for Climate Change Economics and Policy (search for similar items in EconPapers)
JEL-codes: E6 N0 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2021-07-28
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-isf
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:111488

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