Evaluation Of Public Investment Research Articles

Evaluation of public investments and individual discounting

Arrow and Lind’s theorem postulates that ‘when the risks associated with a public investment are publicly borne, the total cost of risk-bearing is insignificant and, therefore, the government should ignore uncertainty in evaluating public investments. Similarly the choice of the rate of discount should in this case be independent of considerations of risk.’ [p.366] The theorem holds regardless security markets are complete, for any public project that is: i) statistically independent of individual income, ii) measured according to an objective probability distribution, iii) evaluated considering individual costs and benefits represented by von Neumann-Morgestern, state-independent utilities; moreover, it holds provided iv) the government spreads the project risks among a large population of people. The independence assumption is necessary to attain that, at the margin, the individual values a public investment as a risk-free claim on future income. Yet, it is a strong one. Arrow and Lind, along with other economists (e.g. Samuelson and Vickrey, 1964), recognize that many public projects alter individuals’ income profiles, either providing new (social) insurance opportunities or representing a further source of risk. They, briefly, address the issue in section III of their paper and conclude that in such cases ‘it is appropriate to discount for risk as would these individuals’ [p. 377]. In this note we discuss and elaborate on Arrow and Lind’s consideration that public projects should effectively be evaluated from the perspective of individuals. The main issue at stake is this approach, although theoretically sound, is informationally very demanding, requiring the measurement of individuals’ benefits and costs or, equivalently, the observation of their preferences and income profiles. Our main point is to argue that this requirement can be weakened exploiting the information revealed by security market prices. More precisely, we appeal to well known results in the theory of asset prices in economies with incomplete markets, to discuss how a (public) decision maker could use market data on security prices to infer on traders’ discount factors and, ultimately, to construct (approximate) measures of the individuals’ willingness to pay for a project. These are the cost-benefit measures suggested by Arrow and Lind, that can be utilized to evaluate any investment project, public and private, independently of the fact they are marketable or give rise to a risk that is uninsurable. At the end of this note

The case for a real options approach to ex-ante cost-benefit analyses of agricultural research projects

The United States Agency for International Development (USAID), like many other development agencies and donors, increasingly emphasizes evidence-based programming. This requires assessments of project performance at all stages of implementation, comprising ex-ante impact assessment, monitoring and evaluation, and ex-post attribution of outcomes. Ex-ante impact assessment, in particular, involves performing Cost-Benefit Analysis (CBA) to determine the Expected Net Present Value (ENPV) of the project in question. Unfortunately, the traditional ENPV approach has proven inadequate for dealing with uncertainty in the timing of investments and flexibility in future decision making. This is especially relevant for Research and Development (R&D) projects which require several stages of product development and multiple rounds of testing prior to releasing final products. As a consequence, the real-options approach to CBA has increasingly been used to evaluate private sector R&D projects. This paper advocates for the adoption of the real options approach in the evaluation of public investments in agricultural research, and illustrates its practical utility with an assessment conducted by USAID to determine the economic viability of a proposed project to develop improved varieties of critical food security crops in Uganda.

Network Evaluation: Thinking on the Implementation Process

The Law n.144 of May 17, 1999 demanded to every Italian central and regional administration to have a public investment evaluation unit, to support the programming activity (with the objective of developing and providing higher quality and efficiency at different levels, for the development policies' programming process). Latest provisions for orientation, and in particular a set of provisions took during the State and Region's Conference (of February, 2000), provisions of Financial Law and of CIPE deliberations, have created the milestones for a significant institutional base of the Italian public administration's evaluating activity.

A General Equilibrium Theory of North-South Trade

This chapter presents an application of competitive general equilibrium theory of markets in the spirit of Walras, formalized in the 1950s by K. Arrow and by G. Debreu. ln using general equilibrium theory to generate insights into current policy issues, it follows a tradition established by Arrow in his work on welfare economics of medical care (1963), on the organization of economic activity (1969), on the evaluation of public investment (Arrow and Lind, 1970), and in urban economic development (1970).

Evaluation of public investment in health care: Is the risk irrelevant?

In this note we discuss the application of developments in economic theory to the evaluation of ‘Risky’ public health programs. We show that the use of expected values as measures of outcome in such programs is inappropriate. Instead we suggest the use of certainty equivalent values measured by a direct assessment (the ‘Standard Gamble’) as an appropriate way to evaluate the outcome.

Discounting and the evaluation of public investments: reply

Discounting and the evaluation of public investments: reply

Discounting and the evaluation of public investments: comment

Discounting and the evaluation of public investments: comment

Evaluating Public Investments in Forestry

SUMMARY Whereas the object of a private investment is usually to maximize profit, the object of an investment of public funds should be to maximize welfare. The evaluation of public investments is therefore much more complicated than the evaluation of private investments. This paper discusses some aspects of the choice between different public investment alternatives. The matters dealt with are: the cost-benefit analysis; the rate at which future costs and benefits should be discounted; the question of who actually benefits from a particular public investment; the creation of employment opportunities; optimal use of scarce water; and finally the socially optimal transport alternative and how it may differ from the private optimum.

The direct income redistributional effects of an irrigation project

In both Canada and the United States the economic decis ion-making c r i te r ion used in the evaluation of public investment in water development projects has typically been the efficiency cr i ter ion; that is the benefits of a project, to whomsoever they accrue must exceed the costs to whomsoever they accrue. However, it is now recognized that economic efficiency is not the only, nor even necessa r i ly the most important, objective of many such public investments. 2 Achieving desirable income redis t r ibut ive effects is frequently an objective. The purpose of this paper is f i r s t to look at the income redis t r ibut ional objective and at the problems ra ised by its incorporation into the economic decis ion-making c r i t e r i a for public investments ; and second to analyze the potential distr ibution of benefits from public investment in an i r r igat ion project.

Discounting and the Evaluation of Public Investments

With the increasing involvement of economists in matters of public policy, especially upon the advent of Planning, Programming and Budgeting and cost-effectiveness, the frequency with which discounting is advocated every time government programs are under debate has tended to give the distorted impression, even within the profession, 1 that it is the most important message the economist has to give. Yet surely the necessity of discounting to the extend that it is legitimate, is already covered by the economist's usual admonition that all relevant costs should be taken into account in evaluating governmental projects. Why then this special emphasis on the inter-temporal opportunity cost of current public spending? Do our public officials really show greater blindness to such costs relative to others? 2 How serious an error does an ‘inappropriate’ discount rate ultimately generate relative to other sources of error in benefit-cost analyses? Since it is not difficult for a determined bureaucrat to produce be...