Abstract
The implications of uncertainty for public investment decisions remain controversial. The essence of the controversy is as follows. 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. Depending upon an individual’s initial asset holdings and utility function, he will value an asset at more or less than its expected value. Therefore, in private capital markets, investors do not choose investments to maximize the present value of expected returns, but to maximize the present value of returns properly adjusted for risk. The issue is whether it is appropriate to discount public investments in the same way as private investments.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
K. J. Arrow, “The Role of Securities in the Optimal Allocation of Risk-Bearing,” Rev. Econ. Stud., Apr. 1964, 31, 91–96.
——, “Discounting and Public Investment Criteria,” in A. V. Kneese and S. C. Smith, eds., Water Research. Baltimore 1966.
——, “The Economics of Moral Hazard: Further Comment,” Amer. Econ. Rev., June 1968, 58, 537–38.
G. Debreu, Theory of Value. New York 1959.
O. Eckstein, “A Survey of the Theory of Public Expenditure,” and “Reply,” Public Finances: Needs, Sources, and Utilization, Nat. Bur. Econ. Res., Princeton 1961, 493–504.
J. Hirshleifer, “Investment Decision under Uncertainty: Choice-Theoretic Approaches,” Quart. J. Econ., Nov. 1965, 79, 509–36.
——, “Investment Decision under Uncertainty: Applications of the State-Preference Approach,” Quart. J. Econ., May 1966, 80, 252–77.
——, J. C. De Haven, and J. W. Milliman, Water Supply: Economics, Technology, and Policy; Chicago 1960.
S. Marglin, “The Social Rate of Discount and the Optimal Rate of Investment,” Quart. J. Econ., Feb. 1963, 77, 95–111.
M. V. Pauly, “The Economics of Moral Hazard: Comment,” Amer. Econ. Rev., June 1968, 58, 531–37.
P. A. Samuelson and W. Vickrey, “Discussion,” Amer. Econ. Rev. Proc., May 1964, 59, 88–96.
J. von Neumann and O. Morgenstern, Theory of Games and Economic Behavior, 2nd ed., New York 1964.
Editor information
Editors and Affiliations
Copyright information
© 1974 American Economic Association
About this chapter
Cite this chapter
Arrow, K.J., Lind, R.C. (1974). Uncertainty and the Evaluation of Public Investment Decisions. In: Gopalakrishnan, C. (eds) Classic Papers in Natural Resource Economics. Palgrave Macmillan, London. https://doi.org/10.1057/9780230523210_4
Download citation
DOI: https://doi.org/10.1057/9780230523210_4
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-41750-6
Online ISBN: 978-0-230-52321-0
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)