Discounting and risk adjusting non-marginal investment projects
2011
Gollier, Christian
Standard cost-benefit analyses and asset pricing theories are based on the assumption that investment projects have marginal impacts on the consumption flows of stakeholders, so that social values and prices are not affected. This may not be true for large projects, such as those related to climate change or to the implementation of infrastructure projects in developing countries. In this paper, we explore qualitatively and quantitatively the error that is made when using the standard evaluation methods for non marginal projects. In particular, we discuss the importance of adapting the discount rate and the risk premium to the size of the investment projects under consideration.
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