Uncertainty and the Evaluation of Public Investment Decisions

Kenneth Arrow and Robert C. Lind

Chapter 3 in Classic Papers in Natural Resource Economics, 1974, pp 54-75 from Palgrave Macmillan

Abstract: Abstract The implications of uncertainty for public investment decisions remain controversial. The essence of the controversy is as follows. It is widely accepted that individuals are not indifferent to uncertainty and will not, in general, value assets with uncertain returns at their expected values. Depending upon an individual’s initial asset holdings and utility function, he will value an asset at more or less than its expected value. Therefore, in private capital markets, investors do not choose investments to maximize the present value of expected returns, but to maximize the present value of returns properly adjusted for risk. The issue is whether it is appropriate to discount public investments in the same way as private investments.

Keywords: Private Investment; Expected Return; Public Investment; Risk Preference; Contingent Claim (search for similar items in EconPapers)
Date: 1974
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DOI: 10.1057/9780230523210_4

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