Risk-adjusted long term social rates of discount for transportation infrastructure investment

Lars Hultkrantz, Niclas Krüger and Panagiotis Mantalos

No 2012:14, Working Papers from Örebro University, School of Business

Abstract: We modify a method recently suggested by Martin Weitzman (2012) for determining a risk-adjusted social discount rate (SDR) term structure consistent with both the (augmented) Ramsey rule and the consumption-based CAPM. Using this approach we estimate SDR for transportation infrastructure investments based on an analysis of correlations between transportation work, split on road and rail, and passenger travel and freight transport, and GDP in Sweden 1950-2011. We show that this can be estimated from two time-series following a random walk with drift, even if they are not co-integrated. Based on current estimates of the risk-free rate and the equity risk premium, we estimate the relevant SDR to be 5-6 percent, possibly somewhat lower for investment in railroads for passenger travel, and only slowly declining within the investment horizon. This is higher than the current rates used in, for instance, Sweden, Germany and the UK.

Keywords: Ramsey rule; CAPM; cost-benefit (search for similar items in EconPapers)
JEL-codes: D61 H43 L91 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-12-18
New Economics Papers: this item is included in nep-tre and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Risk-adjusted long-term social rates of discount for transportation infrastructure investment (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:oruesi:2012_014

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