The effect of public versus private decision environment on the use of the net present value investment criterion

Abstract

Public and private sector managers make investment decisions under uncertainty. Economic efficiency requires that managers who wish to maximize expected utility use NPV. A field test reports that a lower proportion of public managers (20%) utilize NPV than private managers (46%). This difference is significant at p = .01 in both logistic regression and chi-square tests for three competing, but not mutually exclusive, reasons. First, taxpayers are a primary source of capital. Taxation decisions are primarily political events and inefficiency is less likely to be disciplined by capital withdrawal. Second, it is more difficult to estimate expected benefits and costs. Third, investment decisions are often the result of political, not economic, processes. The objective may not be maximization of NPV.

Citation

Richardson, K. (1996), "The effect of public versus private decision environment on the use of the net present value investment criterion", Journal of Public Budgeting, Accounting & Financial Management, Vol. 10 No. 1, pp. 21-52. https://doi.org/10.1108/JPBAFM-10-01-1998-B002