Domar-Musgrave Case Study

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The Domar-Musgrave risk measure was proposed by two very famous economists:-
Evsey David Domar was a Russian American economist, famous as co-author of the Harrod–Domar model. He was a Keynesian economist. He has made contributions in three main areas of economics: economic history, comparative economics and economic growth. His works in the field of economics is uncountable. The most renowned one is: proportional income taxation and risk-taking, with Richard Musgrave, 1944.
Richard Abel Musgrave (December 14, 1910 – January 15, 2007) was American economist of German heritage. His most cited work is the theory of public finance (1959), described as "the first English-language treatise in the field." and "a major contribution to public finance thought."

Domar and Musgrave proposed a measure of risk that measures the expected value of returns less than the returns on a risk-free investment. An investment involves the possibility of a loss. It will not be undertaken unless the expected return appears sufficiently promising. In every investment decision the investor must weigh the advantage of a greater return, or yield, against the disadvantage of a possible loss, or risk. These two variables serve as tools for the analysis of the problem. Modern utility theory shows that, if an individual chooses among assets with uncertain earnings
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The government becomes in effect a partner in the risky venture, taking on part of the risk. This, in turn, can allow investors to take on more of that risky investment, possibly enough so that the increased potential returns offsets, at least somewhat, the imposition of the tax (and likewise, the increased potential loss is offset by the increased deduction for the

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