Estimating the Economic Opportunity Cost of Capital for Public Investment Projects : An Empirical Analysis of the Mexican Case
This paper offers an assessment of the methodologies employed to estimate the economic opportunity cost of capital for public sector projects, relying on the Mexican case for an applied empirical exercise. The traditional weighted cost of capital (...
| Main Authors: | , , |
|---|---|
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/03/19298150/estimating-economic-opportunity-cost-capital-public-investment-projects-empirical-analysis-mexican-case http://hdl.handle.net/10986/17724 |
| Summary: | This paper offers an assessment of the
methodologies employed to estimate the economic opportunity
cost of capital for public sector projects, relying on the
Mexican case for an applied empirical exercise. The
traditional weighted cost of capital (top-down) approach
used in the estimation of Mexico's economic opportunity
cost of capital is reviewed and compared to the supply price
(bottom-up) approach. With respect to previous studies using
the top-down approach, this paper explores the contribution
of domestic savings and expands the analysis to include a
more detailed examination of the available macroeconomic,
labor, financial, and tax information. The re-estimated
top-down economic opportunity cost of capital for Mexico
comes to 10.4 percent. To confirm these results and provide
additional insights regarding the alternative bottom-up
approach, the economic opportunity cost of capital is
estimated using the supply price plus externalities method.
For the case of Mexico, this paper recommends using a
combination of estimation models (both the top-down and
bottom-up approaches) to check the consistency of results
and re-estimating the economic opportunity cost of capital
every five years to accommodate for macroeconomic and fiscal
changes. More broadly, the paper acknowledges the
complexities involved in the estimation of the economic
opportunity cost of capital for public investment projects
and underlines the relevance of additional considerations,
such as changes in global economic trends and country risk
ratings, tax distortions, financial sector improvements, the
impact of reforms, and data availability. |
|---|