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Using Norwegian population panel data with nearly career-long earnings histories, we provide a detailed picture of the causal relationship between schooling and earnings over the life cycle. To address selection bias, we apply three commonly used identification strategies. We find that additional schooling gives higher lifetime earnings and a steeper age-earnings profile, in line with predictions from human capital theory. Our preferred estimates imply an internal rate of return of around 11%, suggesting that it was highly profitable to acquire additional schooling. Our analysis reveals that Mincer regressions dramatically understate the returns to schooling because key assumptions are violated.

This paper presents direct measures of capital costs, equal to the product of the required rate of return on capital and the value of the capital stock. The capital share, equal to the ratio of capital costs and gross value added, does not offset the decline in the labor share. Instead, a large increase in the share of pure profits offsets declines in the shares of both labor and capital. Industry data show that increases in concentration are associated with declines in the labor share.

We document the wide dispersion of private equity investment returns and examine performance determinants using a newly constructed database of 7,500 investments worldwide. One in 10 investments does not return any money, whereas 1 in 4 has an internal rate of return (IRR) above 50%. Quick flips are associated with the highest returns. Performance does not appear scalable: Investments held by private equity firms in periods with a high number of simultaneous investments underperform substantially. Results are consistent with the theoretical literature on organizational diseconomies linked to firm structure. Private equity firms’ actions do not appear to be mechanical or easily scalable.

This lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even in the absence of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes. Third, I look at the evidence on the average risky rate, i.e., the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: the lower the marginal product, the lower the welfare cost of debt. Fourth, I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt, especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case.

At odds with a vast body of economic evidence reporting exceptionally high rates of return to investments in agricultural research and development (R&D), growth in public R&D spending for food and agriculture has slowed in numerous, especially rich, countries worldwide. The observed R&D spending behavior is consistent with a determination that the reported rates of return are perceived as implausible by policy makers. We examine this notion by scrutinizing 2,242 investment evaluations reported in 372 separate studies from 1958 to 2011. We find that the internal rate of return (IRR) is the predominant summary measure of investment performance used in the literature despite methodological criticisms dating back more than a half century. The reported IRRs imply rates of return that are implausibly high. We investigate the reasons for these implausibly high estimates by analytically comparing the IRR to the modified internal rate of return (MIRR). The MIRR addresses several methodological concerns with using the IRR, has the intuitive interpretation as the annual compounding interest rate paid by an investment, and is directly related to the benefit–cost ratio. To obtain more credible rate of return estimates, we then develop a novel method for recalibrating previously reported IRR estimates using the MIRR when there is limited information on an investment's stream of benefits and costs. Our recalibrated estimates of the rate of return are more modest (median of 9.8% versus 39% per year); however, they are still substantial enough to question the current scaling back of public agricultural R&D spending in many countries.

Since 1980, foreign investors have timed their purchases and sales of U.S. Treasurys to yield particularly low returns. Their annual “dollar-weighted” returns, measured by the internal rate of return on their purchases and sales of Treasury bonds, are over 3.26 percentage points (pp) lower than a buy-and-hold strategy over the same horizon. Their returns are 1.62 pp lower than the returns earned by domestic investors. We also explore the heterogeneity across foreign investors, and find that official investors and developing country investors underperform more than other foreign investors. Our results are consistent with theories in which foreign investors are price-inelastic buyers of safe dollar assets, and increase their demand for dollar assets in stress periods.

In this paper I offer a fairly complete account of the idea of social discount rates as applied to public policy analysis. I show that those rates are neither ethical primitives nor observables as market rates of return on investment, but that they ought instead to be derived from economic forecasts and society's conception of distributive justice concerning the allocation of goods and services across personal identities, time, and events. However, I also show that if future uncertainties are large, the formulation of intergenerational well-being we economists have grown used to could lead to ethical paradoxes even if the uncertainties are thin-tailed. Various modelling avenues that offer a way out of the dilemma are discussed. None is entirely satisfactory.

I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics-viz., the PEG ratio and the PE ratio. Proponents of the PEG ratio (which is the price-earnings [PE] ratio divided by the short-term earnings growth rate) argue that this ratio takes account of differences in short-run earnings growth, providing a ranking that is superior to the ranking based on PE ratios. But even though the PEG ratio may provide an improvement over the PE ratio, it is arguably still too simplistic because it implicitly assumes that the short-run growth forecast also captures the long-run future. I provide a means of simultaneously estimating the expected rate of return and the rate of change in abnormal growth in earnings beyond the (short) forecast horizon-thereby refining the PEG ratio ranking. The method may also be used by researchers interested in determining the effects of various factors (such as disclosure quality, cross-listing, etc.) on the cost of equity capital. Although the correlation between the refined estimates and estimates of the expected rate of return implied by the PEG ratio is high, supporting the use of the PEG ratio as a parsimonious way to rank stocks, the estimates of the expected rate of return based on the PEG ratio are biased downward. This correlation is much lower and the downward bias is much larger for estimates of the expected rate of return based on the PE ratio. I provide evidence that stocks for which the downward bias is higher can be identified a priori.

This paper addresses the internal rate of return (IRR) assessment of subsidised production. The difference between the result of IRR calculation and the reality can be largely attributed to uncertainty about the future market price and demand. Thus, in the IRR model the intervals of possible input values instead of uncertain point values should be taken into account. Within the intervals of the input values there is no relevant reason to prefer one value over another. The fuzzy approach is applied to decide whether or not the system of subsidies is adequate in terms of IRR. It leans on the “fuzzy numbers”, which are generalisations of real numbers within the meaning of not referring to a single value but rather to intervals of possible values. The results are then compared with the conventional statistical approach of IRR single-value evaluation. The analogy between the conventional statistical and fuzzy approach is shown on the theoretical level. The practical contribution of this paper lies in the IRR assessment of a subsidised electric car production project. Two scenarios of possible project development are considered. In the study, we derive the algorithm to calculate the average probability of the appearance of the subjectively expected IRR, which is compared with the minimum required profitability. We show that the IRR evaluation of the subsidised production should not be underestimated. The need to verify the adequacy of a subsidised project by a proper tool is given by the fact that many investors mistakenly believe that subsidies will ensure the required profitability. The use of statistical methods in a state of uncertainty can lead to misleading results. The fuzzy analysis offers the investors involving the subjective risk in their decision making more benefits and brings more information compared to statistical approach.

PurposeThis paper delves into the ex ante rates of return demanded by the private sector in Indonesian public–private partnership (PPP) infrastructure projects and the manifold factors emanating from project attributes that can influence these rates.Design/methodology/approachThis paper analyzes feasibility studies of 37 PPP projects across different sectors. The studies were carefully selected based on relevance, completeness and validity of data. The analysis uses statistical techniques, including Levene’s tests, t-tests, ANOVA tests, Cohen’s effect size and Pearson correlations, to explore differences in cost of capital and excess returns across various attributes.FindingsBased on the statistical analysis, no significant difference exists between the excess return of 200 basis points (bps) and the equity excess return of 0 bps. This suggests that the eligibility criteria for PPP projects require an internal rate of return (IRR) equal to the weighted average cost of capital plus 200 bps or an equity IRR equal to the cost of equity. The variations in the tested variables among diverse project attributes do not exhibit statistically significant disparities, even though specific attributes display moderate to high effect sizes.Originality/valueThis paper represents one of the first attempts to examine the rates of return demanded by the private sector in the context of Indonesian PPP projects. It comprehensively explores the factors that influence these rates, drawing on insights derived from feasibility studies.