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Discounting Inside the Washington D.C. Beltway

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Author Info
Coleman Bazelon
Kent Smetters

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Abstract

This article focuses on how the choice of discount rate can dramatically affect policy choices. These policies include whether to build a bridge, whether to privatize a Power Marketing Administration which sells electricity generated by government-owned facilities such as dams, how much money should be spent on early-childhood education, or options for reforming Social Security. The ongoing challenge is to discount future costs or benefits in a way that matches the project's level of riskiness. We begin by discussing the underlying issues in choosing an appropriate discount rate. We then discuss the variety of different discount rates that are actually used by various Washington policymakers and the biases they often generate.

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Publisher Info
Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 13 (1999)
Issue (Month): 4 (Fall)
Pages: 213-228
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Handle: RePEc:aea:jecper:v:13:y:1999:i:4:p:213-228

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  1. Bohn, Henning, 1999. "Fiscal Policy and the Mehra-Prescott Puzzle: On the Welfare Implications of Budget Deficits When Real Interest Rates Are Low," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 1-13, February.
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  2. Hartman, Robert W., 1990. "One thousand points of light seeking a Issue: A case study of CBO's search for a discount rate policy," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S3-S7, March. [Downloadable!] (restricted)
  3. Henning Bohn, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series wp3-98, Department of Economics, UC Santa Barbara. [Downloadable!]
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  4. Antonio Rangel & Richard Zeckhauser, 1999. "Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?," NBER Working Papers 6949, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Merton, Robert C, 1998. "Applications of Option-Pricing Theory: Twenty-Five Years Later," American Economic Review, American Economic Association, vol. 88(3), pages 323-49, June. [Downloadable!] (restricted)
  6. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06. [Downloadable!] (restricted)
  7. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March. [Downloadable!] (restricted)
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  8. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier. [Downloadable!] (restricted)
  9. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  11. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, . "Social Security Money's Worth," Pension Research Council Working Papers 97-20, Wharton School Pension Research Council, University of Pennsylvania.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Daniel Piazalo, 2000. "Poland’s Membership in the European Union: An Analysis with a Dynamic Computable General Equilibrium (CGE) Model," LICOS Discussion Papers 8900, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  2. Alicia H. Munnell & Alex Golub-Sass & Richard W. Kopcke & Anthony Webb, . "What Does It Cost To Guarantee Returns?," Issues in Brief ib2009-9-4, Center for Retirement Research. [Downloadable!]
  3. Deborah Lucas & Marvin Phaup, 1975. "The Cost of Risk to the Government and Its Implications for Federal Budgeting," NBER Chapters, in: Measuring and Managing Federal Financial Risk National Bureau of Economic Research, Inc. [Downloadable!]
  4. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future. [Downloadable!]
    Other versions:
  5. Guadalupe Souto Nieves, 2003. "El descuento social," Hacienda Pública Española, IEF, vol. 165(2), pages 99-126, June. [Downloadable!]
  6. David Popp, 2004. "R&D Subsidies and Climate Policy: Is There a "Free Lunch"?," NBER Working Papers 10880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Diego Nocetti & Elyès Jouini & Clotilde Napp, 2008. "Properties of the Social Discount Rate in a Benthamite Framework with Heterogeneous Degrees of Impatience," Post-Print halshs-00365980_v1, HAL. [Downloadable!]
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