Advertisement

Time-declining risk-adjusted social discount rates for transport infrastructure planning

  • Kathrin Goldmann
Article

Abstract

This paper proposes a social discount rate for transport infrastructure project evaluation in Germany that accounts for production efficiency, systematic traffic demand risk, as well as increasing uncertainty in the long-run. The systematic risk in infrastructure planning is measured by the sensitivity of transport volume towards GDP using cointegration analysis. In contrast to the only existing application of this model in transport economics, in this paper the systematic risk for freight transport projects is substantially higher than for passenger transport projects. Due to different systematic risk patterns, the discount rates for freight and passenger transport projects should differ as well, with the former being equal to approximately 3.5% and declining to 2.7% after 50 years, and the latter ranging between 2.0% and the risk-free rate of 1.3%. This paper focuses especially on the econometric challenges of the CAPM-like estimation of systematic risk in public transport infrastructure project assessment and is at the same time the first application to German data.

Keywords

Social discount rate Traffic demand risk Time series analysis Infrastructure planning Cost-benefit analysis 

Notes

Acknowledgements

The author would like to thank three anonymous referees, Gernot Sieg, David Ennen, Thorsten Heilker, Inga Molenda and Julia Rothbauer for helpful comments.

References

  1. Arrow, K.J., Cropper, M.L., Gollier, C., Groom, B., Heal, G.M., Newell, R.G., Nordhaus, W.D., Pindyck, R.S., Pizer, W.A., Portney, P.R., Sterner, T., Tol, R.S.J., Weitzman, M.L.: Should governments use a declining discount rate in project analysis? Rev. Environ. Econ. Policy 8(2), 145–163 (2014)CrossRefGoogle Scholar
  2. Arrow, K.J., Lind, R.C.: Uncertainty and the evaluation of public investment decisions. Am. Econ. Rev. 60(3), 364–378 (1970)Google Scholar
  3. Boardman, A.E., Greenberg, D.H., Vining, A.R., Weimer, D.L.: Cost- Benefit Analysis, 4th edn. Pearson Education, Boston (2014)Google Scholar
  4. Breeden, D.T.: Intertemporal asset pricing model with stochastic consumption and investment opportunities. J. Financ. Econ. 7, 265–296 (1979)CrossRefGoogle Scholar
  5. Dickey, D.A., Fuller, W.A.: Distribution of the estimators for autoregressive time series with a unit root. J. Am. Stat. Assoc 74(366), 427–431 (1979)CrossRefGoogle Scholar
  6. Dixit, A., Williamson, A.: Risk-Adjusted Rates of Return for Project Appraisal. Worldbank, Washington (1989)Google Scholar
  7. Durbin, J., Watson, G.S.: Testing for serial correlation in least squares regression: I. Biometrika 37(3/4), 409–428 (1950)CrossRefGoogle Scholar
  8. Durbin, J., Watson, G.S.: Testing for serial correlation in least squares regression: II. Biometrika 38(1/2), 159–177 (1951)CrossRefGoogle Scholar
  9. Einbock, M.: Die fahrleistungsabhängige LKW-Maut—Konsequenzen für Un- ternehmen am Beispiel Österreichs, 1st edn. Deutscher Universitäts-Verlag, Wiesbaden (2007)Google Scholar
  10. Engle, R.F., Granger, C.W.J.: Co-integration and error correction: repre- sentation, estimation, and testing. Econometrica 55(2), 251–276 (1987)CrossRefGoogle Scholar
  11. Ewijk, C., Tang, P.J.G.: How to price the risk of public investment? De Economist 151(3), 317–328 (2003)CrossRefGoogle Scholar
  12. Gollier, C.: On the underestimation of the precautionary effect in discounting. CESIFO Working Paper, 3536 (2011)Google Scholar
  13. Gollier, C.: Evaluation of long-dated assets: the role of parameter uncertainty. TSE Working Paper, 12-361 (2015)Google Scholar
  14. Gollier, C.: Gamma discounters are short-terminst. J. Public Econ. 142, 83–90 (2016)CrossRefGoogle Scholar
  15. Gollier, C., Koundouri, P., Pantelidis, T.: Declining discount rates: economic justifications and implications for long-run policy. Econ. Policy 23(56), 757–795 (2008)CrossRefGoogle Scholar
  16. Harrison, M.: Valuing the future: the social discount rate in cost-benefit analysis. Australian Government Productitity Commission (2010)Google Scholar
  17. Hepburn, C., Koundouri, P., Panopoulou, E., Pantelidis, T.: Social discounting under uncertainty: a cross-country comarison. J. Environ. Econ. Manag. 57, 140–150 (2009)CrossRefGoogle Scholar
  18. HM Treasury.: The green book—appraisal and evaluation in central government. Technical report, HM Treasury (2011)Google Scholar
  19. Hultkrantz, L., Krüger, N., Mantalos, P.: Risk-adjusted long term social rates of discount for transportation infrastructure investment. Res. Transp. Econ. 47, 70–81 (2014)CrossRefGoogle Scholar
  20. Hultkrantz, L., Mantalos. P.: Hedging with trees: tail-hedged discounting long-term forestry returns. Örebro University working paper (2016)Google Scholar
  21. Jarque, C.M., Bera, A.K.: Efficient tests for normality, homoskedasticity and serial independence of regression residuals. Econ. Lett. 6(1980), 255–259 (1980)CrossRefGoogle Scholar
  22. Johansen, S.:Correlation, regression, and cointegration of nonstationary economic time series. Discussion Papers Department of Economics, University of Copenhagen. 7(25), (2007)Google Scholar
  23. Krüger, N.A.: Estimating traffic demand risk—a multiscale analysis. Transp. Res. Part A 46, 1741–1751 (2012)Google Scholar
  24. Lebègue, D.: Révision du taux d’actualisation des investissements publics. Technical report, Commisariat Général du Plan (2005)Google Scholar
  25. Lintner, J.: The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Rev. Econ. Stat. 47(1), 13–37 (1965)CrossRefGoogle Scholar
  26. Little, I.M.D., Mirrlees, J.A.: Project appraisal and planning for developing countries. Heinemann Educational Books Ltd, London (1974)Google Scholar
  27. MacKinnon, J.G.: Critical values for cointegration tests. Queen’s Economics Department Working Paper No. 1227 (2010)Google Scholar
  28. Mehra, R., Prescott, E.C.: The equity premium puzzle—a puzzle. J. Monet. Econ. 15, 145–161 (1985)CrossRefGoogle Scholar
  29. Merton, R.C.: An intertemporal capital asset pricing model. Econometrica 41(5), 867–887 (1973)CrossRefGoogle Scholar
  30. Mossin, J.: Equilibrium in a capital asset market. Econometrica 34(4), 768–783 (1966)CrossRefGoogle Scholar
  31. Newey, W.K., West, K.D.: A simple, positive semi-definite heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3), 703–708 (1987)CrossRefGoogle Scholar
  32. Ramanathan, R.: The long-run behaviour of transport performance in India: a cointegration approach. Transp. Res. Part A 35, 309–320 (2001)Google Scholar
  33. Sharpe, W.F.: Capital asset prices: a theory of market equilibrium under conditions for risk. J. Financ. 19(3), 425–442 (1964)Google Scholar
  34. Weitzman, M.L.: Why the far-distant future should be discounted at its lowest possible rate. J. Environ. Econ. Manag. 36, 201–208 (1998)CrossRefGoogle Scholar
  35. Weitzman, M.L.: Gamma discounting. Am. Econ. Rev. 91(1), 260–271 (2001)CrossRefGoogle Scholar
  36. Weitzman, M. L.: Rare disasters, tail-hedged investments, and risk-adjusted discount rates. NBER Working paper series, 18496 (2012)Google Scholar
  37. Weitzman, M.L.: Tail-hedge discounting and the social costs of carbon. J. Econ. Lit. 51(3), 873–882 (2013)CrossRefGoogle Scholar
  38. Zivot, E., Andrews, D.W.K.: Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. J. Bus. Econ. Stat. 10(3), 251–270 (1992)Google Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Institute of Transport EconomicsUniversity of MünsterMünsterGermany

Personalised recommendations