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Revisiting Social Discount Rates for Public Investment

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  • Song, Joon Hyuk

Abstract

This paper aims to estimate the social discount rate (SDR) rather than dig into its theoretical foundation. As SDRs can be derived by investigating both the rate of return on investment and the social time preference rate, we estimate the marginal productivity of both private and public capital and the time preference rate based on the Euler equation. In order to provide a single representative SDR, the weighted averages of the marginal productivity and time preference rate, whose weights are determined by the flow of funds data reflecting the social demand of funds, are presented. Based on the empirical results, we argue that the marginal productivity of private capital stands in the middle of the 3% range while that of public capital varies from 4.5% to 8.6%, with the time preference rate showing a decreasing trend from 3.2% in the early 2000s to 1.2% by around 2030. The single representative SDR or the weighted SDR is estimated to be approximately 3.0~4.5% and expected to continue its downward trend for the foreseeable future.

Suggested Citation

  • Song, Joon Hyuk, 2017. "Revisiting Social Discount Rates for Public Investment," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 39(2), pages 75-98.
    • Handle: RePEc:zbw:kdijep:200808
    DOI: 10.23895/kdijep.2017.39.2.75
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    References listed on IDEAS

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    2. Michael Spackman, 2001. "Public Investment and Discounting in European Union Member States," OECD Journal on Budgeting, OECD Publishing, vol. 1(2), pages 213-260.
    3. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    4. Stephen A. Marglin, 1963. "The Social Rate of Discount and The Optimal Rate of Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 77(1), pages 95-111.
    5. Stephen A. Marglin, 1963. "The Opportunity Costs of Public Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 77(2), pages 274-289.
    6. Kay, J. A., 1972. "Social discount rates," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 359-378, November.
    7. E. J. Mishan, 1967. "Criteria for Public Investment: Some Simplifying Suggestions," Journal of Political Economy, University of Chicago Press, vol. 75(2), pages 139-139.
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    More about this item

    Keywords

    Social Discount Rate; Opportunity Cost of Capital; Rate of Time Preference;
    All these keywords.

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H8 - Public Economics - - Miscellaneous Issues

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