Valuation of Government Policies and Projects

Deborah Lucas

Annual Review of Financial Economics, 2012, vol. 4, issue 1, 39-58

Abstract: Governments play a central role in the allocation of capital and risk in the economy. Evaluating the cost to taxpayers of government investments requires an assumption about the government's cost of capital. Governments often take their borrowing rate to be their cost of capital, which implicitly treats the market risk associated with their activities as having no cost to taxpayers. This article reviews the theoretical and practical rationale for treating market risk as a cost to governments, presents an interpretive review of the growing literature that applies the concepts and tools of modern finance to evaluating the costs of government policies and projects, and suggests directions for future research. Examples considered include deposit insurance, Fannie Mae and Freddie Mac, the Federal Reserve's emergency lending facilities, student loans, real infrastructure investments, and public pension plans.

Keywords: asset pricing; cost of capital; government guarantees; social discount rate (search for similar items in EconPapers)
JEL-codes: G12 G28 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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