Comparison of Public Investment Approaches on Social Welfare Function: A Case Study of Iran

The use of natural resource revenues for achievement of development has been a challenging issue for resource abundant countries. these challenges stem from the fact that incomes from natural resources are non-durable, unpredictable and uncertain. different countries have pursued various approaches and tools for managing these revenues to avoid economic fluctuations. the international organizations and economic experts propose a diversification in the use of resource revenues through different approaches of public investment. maximizing the social welfare function has become a common guideline for resource revenue management in resource-rich countries. this article investigates the effect of public investment approaches and their impacts on intergenerational social welfare function of iran. to this end, the impact of two public investment approaches, namely permanent income hypothesis (pih) and bird in hand (bih), was examined and compared on a certainty equivalent (ce) of social welfare function. results of the simulation with iran's economic data indicated substantial positive loss in welfare if switching to the bih approach. calculations show that the ce of social welfare function for pih and bih is 786.3 and 444.3, respectively. the baseline simulation estimates 𝑔𝑎𝑝 = 0.77 confirming the theoretical model’s prediction that the approach based on the pih provides a substantially higher welfare level for economy. in other words, the jump in ce investment necessary for the bih approach to generate the same level of utility as the pih approach is estimated in the base-line simulation to be approximately 0.77 times the level expressed by the ce_bih