The use of derivatives in a public sector setting

Abstract

Existing private sector models of derivative use do not readily translate into the public sector that faces the joint objectives of value maximisation and provision of a privately unprofitable mission good. This paper develops and tests a model explaining public sector derivative use in terms of budget discrepancy minimisation. Hypotheses are developed and tested using logistic regression over a sample of Australian Commonwealth Government entities. It is found that public sector derivative use is positively correlated with liabilities and size of the organisation. This is consistent with management of budget discrepancies.