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Understanding political risk in investment planning
Author(s) -
Bodde David L.,
Lewis David L.
Publication year - 1984
Publication title -
journal of policy analysis and management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.898
H-Index - 84
eISSN - 1520-6688
pISSN - 0276-8739
DOI - 10.1002/pam.4050030405
Subject(s) - political risk , consolidation (business) , rate of return , economics , politics , investment (military) , return on investment , productivity , government (linguistics) , cost–benefit analysis , business , finance , public economics , microeconomics , macroeconomics , political science , law , linguistics , philosophy , production (economics)
In 1982, the Congress authorized $11 billion to modernize the nation's air traffic control system—one of the largest infrastructure investments since the building of the interstate highway system. Although this investment appears to offer a large and robust return, the economic results depend strongly on productivity gains through system consolidation. It is uncertain what balance the Congress will strike between the long‐term, widely shared benefits of greater productivity and the immediate job losses from system consolidation. This risk can be included in the calculus of expected return through Monte Carlo analysis. When this is done, the expected return drops very close to the 10% hurdle rate that the government often uses for such projects. This method of integrating political risk can be applied to any investment, public or private, for which political action joins the customary economic and technical uncertainties in affecting the outcome.