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Accounting for systematic risk in benefit-cost analysis: a practical approach

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  • Hansen, Jason
  • Lipow, Jonathan

Abstract

Circular A-94 specifies how analysts should discount costs and benefits of government projects, and thus how to account for risk. In this paper, we argue that the methods mandated by A-94 properly account for non-systematic and term risk, but not for systematic risk. A numerical example illustrates how improper accounting for systematic risk produces misleading results and social welfare loss. We conclude by proposing a simple modification of A-94’s procedures that would allow analysts to at least partially account for systematic risk.

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  • Hansen, Jason & Lipow, Jonathan, 2013. "Accounting for systematic risk in benefit-cost analysis: a practical approach," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(3), pages 361-373, December.
    • Handle: RePEc:cup:jbcoan:v:4:y:2013:i:03:p:361-373_00
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    1. Mamun, Saleh & Hansen, Jason K. & Roni, Mohammad S., 2020. "Supply, operational, and market risk reduction opportunities: Managing risk at a cellulosic biorefinery," Renewable and Sustainable Energy Reviews, Elsevier, vol. 121(C).

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