Risk-adjusted social discount rates

Frédéric Cherbonnier and Christian Gollier ()

No 18-972, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: When evaluating public and private investment projects, those that contribute more to the collective risk should be more penalized through an upward adjustment of their discount rate. This paper shows how to estimate the risk-adjusted discount rate for different projects, with applications to the electricity sector. Using the standard framework of consumer theory, we express any investment project’s beta in terms of the easier-to-measure price and income elas-ticities of the goods generated by the project. When considering an investment in production capacity, the beta has a flat term structure, and is positive (negative) for normal (inferior) goods. When considering core infrastructures carrying goods or services, such as energy transmission and distribution assets, the beta has a decreasing term structure with very high values at short horizons for infrastructures facing capacity constraints. We provide a real-case example of a cross-border electricity connection with negative beta for the exporting country.

Keywords: Investment valuation; investment decision; CCAPM; risk-adjusted discount rate (search for similar items in EconPapers)
JEL-codes: D61 G11 H43 L94 (search for similar items in EconPapers)
Date: 2018-10, Revised 2020-12
New Economics Papers: this item is included in nep-ene and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:33135

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