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Public versus Private Cost of Capital with State-Contingent Terminal Value

Author

Listed:
  • Luciano Greco
  • Mariano Moszoro

Abstract

The economic debate underlines the reasons why discount rates of infrastructure projects should be similar, regardless the public or private source of financing, during the forecast period when flows are risky but predictable. In contrast, we show that the incompleteness of contracts between governments and private firms beyond the forecast period (i.e., when flows of net social benefits are state-contingent) entails expected terminal values that are systematically larger under government rather than private financing. This effect provides a new rationale for applying a lower discount rate in the assessment of projects under public financing as compared to private financing.

Suggested Citation

  • Luciano Greco & Mariano Moszoro, 2023. "Public versus Private Cost of Capital with State-Contingent Terminal Value," IMF Working Papers 2023/056, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/056
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