 Government's credit-rating concerns and the evaluation of public projectsJournal of Public Economics, 2014, vol. 115, issue C, 117-130 Abstract: Public projects typically generate both monetary revenue and social benefits that cannot be monetized. We show that a government concerned with the credit rating of its debt should put different discount rates on these two aspects. The credit rating reflects the probability of default on the government's debt and thus affects its financing costs. Monetary revenues, which can be used in financial distress to repay debt, improve the credit rating and thus carry an additional “credit-market value” compared to social benefits. However, informational problems – dynamic inconsistency and adverse selection – push the government to an excessive emphasis on social benefits, ignoring the external effect of monetary revenue on debtholders. Since the credit market anticipates this, the government's credit rating is adversely affected and it is thus unable to extract the full potential value of the projects. Privatization can sometimes alleviate these problems; However, the option to privatize has complex effects on the market's assessment of projects that remain in government's hands and thus might sometimes be harmful. Keywords: Public projects; Credit rating; Social discount rate; Privatization (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:115:y:2014:i:c:p:117-130 DOI: 10.1016/j.jpubeco.2013.11.007 Access Statistics for this article Journal of Public Economics is currently edited by R. Boadway and J. Poterba More articles in Journal of Public Economics from Elsevier |
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