24 - Uncertainty and the Evaluation of Public Investment Decisions

Abstract

This chapter focuses on uncertainty and the evaluation of public investment decision. The implications of uncertainty for public investment decisions remain controversial. 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. The issue is whether it is appropriate to discount public investments in the same way as private investments. There are several positions on this issue. The first is that the risk should be discounted in the same way for public investments as it is for private investments. The second position is that the government can better cope with uncertainty than private investors, and, therefore, government investments should not be evaluated by the same criterion used in private markets. In addition, there is a third position on the government's response to uncertainty. This position rejects the notion that individual preferences as revealed by market behavior are of normative significance for government investment decisions, and it asserts that time and risk preferences relevant for government action should be established as a matter of national policy.