Public Investment As Commitment
Should public assets such as infrastructure, education, and the environment earn the same return as private investments? The authors consider if time-inconsistent decision-makers can gain from institutions that enforce cost-benefit rules on large projects that influence the economy as a whole. Long-term public investments provide commitment to current preferences, leading to investment biases in such assets. The institutionalized cost-benefit prudence eliminates such biases but they show that this behavioral rule has no general social value: it implements Pareto efficiency if and only if preferences are time-consistent, and decreases welfare otherwise.