Capital market equilibrium in a mixed economy, optimal public sector investment decision rules and the social rate of discount

Abstract

What rate of discount should be used by publicly owned enterprises in their evaluation of risky investments? According to Hirshleifer, and Baumol, the public sector firm should use the same cutoff rate as a private firm would use if faced with the same project. Baumol, for example, states that: [society] benefits from the entire set of investment projects currently undertaken, whether they are public or private. The mere transfer of an investment's sponsorship from private hands to government does not per se affect its flow of benefits to society nor does it mean that its risks are any more or less offsettable against the risks of other projects.2