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Social discount rates for the European Union

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  • David J. EVANS

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    Abstract

    In relation to social project appraisal in EU countries, governments should try to agree on a single generally preferred method of discounting. Consistency of approach should result in the application of similar discount rates by countries. Before 2003, the use of different methods resulted in the application of widely divergent rates; for example, 8% in France, 3% in Germany and 6% in Britain. New appraisal guidance by the British Treasury in 2003 saw the official UK rate, now based solely on social time preference, reduced to just 3. 5%. In 2005, France followed suit reducing its rate from 8% to 4%. This paper argues for a standard benchmark European discount rate of around 3%-4% based on social time preference (STPR). This rate is somewhat lower than the 5% rate suggested in the 2002 EC guide to cost-benefit analysis and, as such, its application should result in a more generous allocation of budget funds to longer-term projects. For estimation purposes, the most troublesome component of the STPR formula is the elasticity of marginal utility of consumption (e). This paper reviews recent evidence on e and argues for the application of more thoughtful approaches in order to establish a reliable interval estimate for EU countries

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    Bibliographic Info

    Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2006-20.

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    Date of creation: 13 Oct 2006
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    Handle: RePEc:mil:wpdepa:2006-20

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    Keywords: Cost-benefit analysis; social discount rate; European Union;

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    1. Attanasio, O.P. & Browning, M.J., 1993. "Consumption over the life cycle and over the business cycle," Discussion Paper 1993-14, Tilburg University, Center for Economic Research.
    2. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    3. David Evans, 2004. "The elevated status of the elasticity of marginal utility of consumption," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 443-447.
    4. Michael Spackman, 2004. "Time discounting and of the cost of capital in government," Fiscal Studies, Institute for Fiscal Studies, vol. 25(4), pages 467-518, December.
    5. Kula, Erhun, 1984. "Derivation of Social Time Preference Rates for the United States and Canada," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 873-82, November.
    6. David Evans, 2004. "A social discount rate for France," Applied Economics Letters, Taylor & Francis Journals, vol. 11(13), pages 803-808.
    7. David J. Evans, 2005. "The elasticity of marginal utility of consumption: estimates for 20 OECD countries," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 197-224, June.
    8. Erhun Kula, 2004. "Estimation of a Social Rate of Interest for India," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(1), pages 91-99.
    9. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-97, June.
    10. Blundell, Richard & Browning, Martin & Meghir, Costas, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 57-80, January.
    11. Marco Percoco, 2007. "A social discount rate for Italy," Applied Economics Letters, Taylor & Francis Journals, vol. 15(1), pages 73-77.
    12. Blundell, Richard, 1988. "Consumer Behaviour: Theory and Empirical Evidence--a Survey," Economic Journal, Royal Economic Society, vol. 98(389), pages 16-65, March.
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    Cited by:
    1. King, Steven & Fraser, Iain, 2013. "Divestment of the English Forestry Estate: An economically sound choice?," Ecological Economics, Elsevier, vol. 88(C), pages 25-31.
    2. Jan Kubíček & Leoš Vítek, 2010. "Evaluation of Public Projects from the Viewpoint of Social Rate of Discount," Politická ekonomie, University of Economics, Prague, vol. 2010(3), pages 291-304.
    3. Kovacevic, Vujadin & Wesseler, Justus, 2010. "Cost-effectiveness analysis of algae energy production in the EU," Energy Policy, Elsevier, vol. 38(10), pages 5749-5757, October.
    4. Silvana Tordo, 2007. "Fiscal Systems for Hydrocarbons : Design Issues," World Bank Publications, The World Bank, number 6746, October.

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