Accounting for systematic risk in benefit-cost analysis: a practical approach

Jason Hansen and Jonathan Lipow

Journal of Benefit-Cost Analysis, 2013, vol. 4, issue 3, 361-373

Abstract: Circular A-94 specifies how analysts should discount costs and benefits of government projects, and thus how to account for risk. In this paper, we argue that the methods mandated by A-94 properly account for non-systematic and term risk, but not for systematic risk. A numerical example illustrates how improper accounting for systematic risk produces misleading results and social welfare loss. We conclude by proposing a simple modification of A-94’s procedures that would allow analysts to at least partially account for systematic risk.

Date: 2013
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