Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-12T19:48:12.420Z Has data issue: false hasContentIssue false

More appropriate discounting: the rate of social time preference and the value of the social discount rate

Published online by Cambridge University Press:  19 January 2015

Mark A. Moore*
Affiliation:
Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada
Anthony E. Boardman
Affiliation:
Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada
Aidan R. Vining
Affiliation:
Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada
*
Mark A. Moore, Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada, [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Recently, a number of authors, including Burgess and Zerbe, have recommended the use of a real social discount rate (SDR) in the range of 6–8% in benefit-cost analysis (BCA) of public projects. They derive this rate based on the social opportunity cost of capital (SOC) method. In contrast, this article argues that the correct method is to discount future impacts based on the rate of social time preference (STP). Flows in or out of private investment should be multiplied by the shadow price of capital (SPC). Using this method and employing recent United States data, we obtain an estimate of the rate of STP of 3.5% and an SPC of 2.2. We also re-estimate the SDR using the SOC method and conclude that, even if analysts continue to use this method, they should use a considerably lower rate of about 5%.

Type
Article
Copyright
Copyright © Society for Benefit-Cost Analysis 2013

References

Arrow, K. J. (1995). Intergenerational equity and the rate of discount in long-term social investment. Paper presented at the IEA World Congress. Available at: http:www-econ.stanford.edu/faculty/workp/swp97005.pdf. Accessed on 11 February 2008.Google Scholar
Arrow, K. J., Cline, W. R., Maler, K. -G., Munasinghe, M., Squitieri, R., & Stiglitz, J. E. (1996). Intertemporal equity, discounting and economic efficiency. In: Bruce, J. P., et al. (Eds.), Climate change 1995 (pp. 128144). Cambridge, UK: Cambridge University Press.Google Scholar
Belfield, C. R., Nores, M., Barnett, S., & Schweinhart, L. (2006). The high/scope perry preschool program: cost-benefit analysis using data from the age-40 followup. The Journal of Human Resources 41(1), 162190.Google Scholar
Boardman, A. E., Moore, M. A., & Vining, A. R. (2010). The social discount rate for Canada based on future growth in consumption. Canadian Public Policy 36(3), 323341.Google Scholar
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2011). Cost-benefit analysis: concepts and practice (4th ed). Upper Saddle River, N.J.: Prentice Hall.Google Scholar
Bradford, D. F. (1975). Constraints on government investment opportunities and the choice of discount rate. American Economic Review 65(5), 887899.Google Scholar
Burgess, D. F., & Zerbe, R. O. (2011). Appropriate discounting for benefit-cost analysis. Journal of Benefit-Cost Analysis 2(2), Article 2.CrossRefGoogle Scholar
Checherita, C., & Rother, P. (2010). The impact of high and growing government debt on economic growth: an empirical investigation for the euro area. European Central Bank Working Paper No. 1237.Google Scholar
Chen, D., & Mintz, J. (2011). New estimates of effective corporate tax rates on business investment. Cato Institute Tax & Budget Bullletin # 64. Feb.Google Scholar
Cline, W. R. (1992). The economics of global warming. Washington, DC: Institute for International Economics.Google Scholar
Cole, D. (2010). Blog on ‘Law, Economics and Cycling.’ Dec 25, Available at: http://cyclingprof.blogspot.ca/2010/12/revised-report-on-principles-standards.html.Google Scholar
Cropper, M. L. (2012). How should benefits and costs be discounted in an intergenerational context? Resources for the Future Discussion Paper 1242.Google Scholar
Eckstein, O. (1958). Water resource development: the economics of project evaluation. Cambridge, Mass: Harvard University Press.Google Scholar
European Commission. (2008). Guide to cost-benefit analysis of investment projects. Available at: http://ec.europa.eu/regional_policy/sources/docgener/guides/cost/guide2008_en.pdf. Accessed on 25 October 2011.Google Scholar
Evans, D. J. (2005). The elasticity of marginal utility of consumption: estimates for 20 oecd countries. Fiscal Studies 26(2), 197224.CrossRefGoogle Scholar
Evans, D. J., & Sezer, H. (2004). Social discount rates for six major countries. Applied Economic Letters 11(9), 557560.CrossRefGoogle Scholar
Feldstein, M. (1972). The inadequacy of weighted discount rates. In: Layard, R. (Ed.), Cost-benefit analysis (pp. 311332). Harmondsworth, UK: Penguin.Google Scholar
Frederick, S., Loewenstein, G., & O’Donoghue, T. (2002). Time discounting and time preference: a critical review. Journal of Economic Literature 40(2), 351400.Google Scholar
Gollier, C., Koundouri, P., & Pantelidis, T. (2008). Declining discount rates: economic justifications and implications for long-run policy. Economic Policy 23, 759795.Google Scholar
Gordon, R. J. (2012). Is U.S. economic growth over? faltering innovation confronts the six headwinds. NBER Working Paper 18315.Google Scholar
Harberger, A. C. (1972). On measuring the social opportunity cost of public funds. In: Project evaluation: selected papers. Chicago: University of Chicago Press.Google Scholar
HM Treasury. (2003). The Green Book: appraisal and evaluation in central government. London: TSO. Available at: www.hm-treasury.gov.uk/d/green_book_complete.pdf.Google Scholar
Hepburn, C. J., & Koundouri, P. (2007). Recent advances in discounting: implications for forest economics. Journal of Forest Economics 13(2–3), 169189.Google Scholar
Jenkins, G. P. (1973). The measurement of rates of return and taxation for private capital in Canada. In: Niskanen, W.A. et al. (Eds.), Benefit cost and policy analysis (pp. 211245). Chicago: Aldine.Google Scholar
Kula, E. (1984). Derivation of social time preference rates for the United States and Canada. Quarterly Journal of Economics 99(4), 873882.CrossRefGoogle Scholar
Lind, R. C. (Ed.). (1982). Discounting for time and risk in energy policy. Baltimore and Washington, DC: Johns Hopkins University Press and Resources for the Future.Google Scholar
Marglin, S. A. (1963). The opportunity costs of public investment. Quarterly Journal of Economics 77(2), 274289.Google Scholar
Mirrlees, J. A., & Stern, N. H. (1972). Fairly good plans. Journal of Economic Theory 4(2), 268288.Google Scholar
Moore, M. A., Boardman, A. E., Vining, A.R., Weimer, D. W., & Greenberg, D. H. (2004). Just give me a number!: practical values for the social discount rate. Journal of Policy Analysis and Management 23(4), 789812.CrossRefGoogle Scholar
Newell, R. G., & Pizer, W. A. (2003). Discounting the distant future: how much do uncertain rates increase valuations? Journal of Environmental Economics and Management 46(1), 5271.Google Scholar
Nordhaus, W. D. (1999). Discounting and public policies that affect the distant future. In: Portney, P. R. & Weyant, J. P. (Eds.), Discounting and intergenerational equity (pp. 145162). Washington, DC: Resources for the Future.Google Scholar
Nordhaus, W. D. (2007). A review of the Stern review on the economics of climate change. Journal of Economic Literature 45(3), 682702.Google Scholar
OECD. (2010). OECD StatExtracts: Taxing Wages at www.stats.oecd.org/Index.aspx (accessed on July 21, 2011).Google Scholar
Portney, P. R., & Weyant, J. P. (Eds.). (1999). Discounting and intergenerational equity. Washington, DC: Resources for the Future.Google Scholar
Prescott, E. (2002). Prosperity and depressions. American Economic Review 92(2), 115.Google Scholar
Ramsey, F. P. (1928). A mathematical theory of saving. Economic Journal 38(151), 543559.Google Scholar
Reinhart, C. M., & Rogoff, K. S. (2009). This time is different: eight centuries of financial folly. Princeton, NJ: Princeton University Press.Google Scholar
Rothstein, J., & Rouse, C. E. (2011). Constrained after college: student loans and early-career occupational choices. Journal of Public Economics 95(1–2), 149163.Google Scholar
Shiller, R. (2005). Irrational exuberance (2nd ed). Princeton: Princeton University Press. Data source: Available at: http://www.econ.yale.edu/~shiller/data/chapt26.xls (accessed on June 30, 2011).Google Scholar
Shoven, J.B., & Topper, M. (1992). The cost of capital in Canada, the United States and Japan. In: Shoven, J.B. & Whalley, J. (Eds.), Canada-U.S. tax comparisons (pp. 217235). Chicago, IL: University of Chicago Press.Google Scholar
Spackman, M. (2004). Time discounting and of the cost of capital in government. Fiscal Studies 25(4), 467518.Google Scholar
Stern, N. (2007). The economics of climate change: the Stern review. New York: Cambridge University Press.CrossRefGoogle ScholarPubMed
Weitzman, M. L. (2001). Gamma discounting. American Economic Review 91(1), 260271.Google Scholar
Weitzman, M. L. (2007). A review of the Stern review on the economics of climate change. Journal of Economic Literature 45(3), 703724.Google Scholar
Zerbe, R. O. Jr., Davis, T. B., Garland, N., & Scott, T. (2010). Toward principles and standards in the use of benefit-cost analysis. Benefit-Cost Analysis Centre, University of Washington, 10 November. Accessed on 28 December 2010.Google Scholar
Zerbe, R. O. Jr., Davis, T. B., Garland, N., & Scott, T. (2011). Toward principles and standards in the use of benefit-cost analysis. Benefit-Cost Analysis Centre, University of Washington (Available at: http://evans.washington.edu/files/Final-Principles-and%20Standards-Report--6_23_2011.pdf), Accessed on 29 August 2012.Google Scholar