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Risk - adjusted rates of return for project appraisal

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  • Dixit, Avinash
  • Williamson, Amy

Abstract

Incorporating risk assessment into public project appraisal makes sense when project risk is significantly correlated with uncertainty about national income. It is especially important in countries that specialize in particular agricultural or resource sectors. This report presents the following conclusions: (a) risk corrections can be substantial; (b) the intuition that risk is great for further investment in a crop or sector that constitutes a large part of a country's GNP is not invalid, but the effect may be offset by other forces in operation; (c) risk corrections can be negative because of a negative correlation between project return and GNP; (d) risk premia vary greatly across countries and sectors - so recognizing the risk correction needed for each project on its own merits makes more sense than including a common general risk premium in the rate of return required for all lending; (e) risk corrections are small for many sectors and countries - so efforts can be concentrated on the other categories, where the proposed treatment of risk makes a big difference; (f) risk affects investment projects in many different, subtle ways; and (g) resource requirements for this are not great.

Suggested Citation

  • Dixit, Avinash & Williamson, Amy, 1989. "Risk - adjusted rates of return for project appraisal," Policy Research Working Paper Series 290, The World Bank.
    • Handle: RePEc:wbk:wbrwps:290
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    References listed on IDEAS

    as
    1. Anderson, J.R., 1989. "Forecasting, uncertainty, and public project appraisal," Policy Research Working Paper Series 154, The World Bank.
    2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    3. Anderson, Jock R., 1989. "Reconsiderations On Risk Deductions In Public Project Appraisal," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 33(2), pages 1-5, August.
    4. Lund, D., 1988. "Social Discount Rates Under Uncertainty- A Reexamination And Extension Of Sandmo'S "Farm" Model," Memorandum 1988_010, Oslo University, Department of Economics.
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    Cited by:

    1. Qingran Li & William A. Pizer, 2018. "The Discount Rate for Public Policy over the Distant Future," NBER Working Papers 25413, National Bureau of Economic Research, Inc.
    2. Kathrin Goldmann, 2019. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Transportation, Springer, vol. 46(1), pages 17-34, February.
    3. Li, Qingran & Pizer, William A., 2021. "Use of the consumption discount rate for public policy over the distant future," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    4. Anderson, Jock R., 1990. "Thoughts On Risk Accounting In Public Project Appraisal," 1990 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk Meeting, January 28-31, 1990, Sanibel Island, Florida 271534, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.

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