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Discounting Disentangled

Author

Listed:
  • Drupp, Moritz A.

    (Department of Economics, University of Kiel, Germany)

  • Freeman, Mark C.

    (School of Business and Economics, Loughborough University, United Kingdom)

  • Groom, Ben

    (Department of Geography and Environment, London School of Economics, United Kingdom)

  • Nesje, Frikk

    (Dept. of Economics, University of Oslo)

Abstract

As the most important driver of long-term project evaluation, from climate change policy to infrastructure investments, the social discount rate (SDR) has been subject to heated debate among economists. To uncover the extent and sources of disagreement, we report the results of a survey of over 200 experts that disentangles the long-term SDR into its component parts: the pure rate of time preference, the wealth eff ect, and the real risk-free interest rate. The mean recommended SDR is 2.27 percent, with a range from 0 to 10 percent. Despite disagreement on point values, more than three-quarters of experts are comfortable with the median SDR of 2 percent, and over 90 percent find an SDR in the range of 1 to 3 percent acceptable. Our disentangled data reveal that only a minority of responses are consistent with the Ramsey Rule, the theoretical framework dominating discounting policy. Instead, experts recommend that governmental discounting guidance should be updated to deal with uncertainty, relative prices, and alternative ethical approaches.

Suggested Citation

  • Drupp, Moritz A. & Freeman, Mark C. & Groom, Ben & Nesje, Frikk, 2015. "Discounting Disentangled," Memorandum 20/2015, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2015_020
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    References listed on IDEAS

    as
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    2. Cropper, Maureen, 2012. "How Should Benefits and Costs Be Discounted in an Intergenerational Context?," RFF Working Paper Series dp-12-42, Resources for the Future.
    3. Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newell, Richard G. & Nordhaus, William D. & Pindyck, Robert S. & Pizer, William A. & Portney, Paul R. & , 2012. "How Should Benefits and Costs Be Discounted in an Intergenerational Context? The Views of an Expert Panel," RFF Working Paper Series dp-12-53, Resources for the Future.
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    More about this item

    Keywords

    Social discount rate; project appraisal; expert opinions; disagreement.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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