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Musings on the Social Discount Rate

Author

Listed:
  • Arnold C. Harberger

    (University of California, Los Angeles, USA)

  • Glenn P. Jenkins

    (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus)

Abstract

This paper is mainly concerned with weighted average measures of the social discount rate, where the components of the average are the marginal productivity of investment (measured by its gross-of-tax rate of return), and the marginal rate of time preference (measured by the net-of-tax yield of capital). We believe that these components should best be measured using data (the national accounts) that span the whole economy and reflect the product actually produced and the rewards actually perceived. We use a methodology based on just four familiar parameters to generate productivity estimates applicable to a wide range of countries. In the process, we make an adjustment for infrastructure investment, also excluding income from land, monopoly markups, supra-marginal returns due to TFP increases, and returns to capital in financial intermediation. The end products are estimates of social discount rates averaging around 8 percent for the advanced countries, and 10 percent for healthy developing countries and Asian Tigers.

Suggested Citation

  • Arnold C. Harberger & Glenn P. Jenkins, 2015. "Musings on the Social Discount Rate," Development Discussion Papers 2015-01, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:271
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    Citations

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    Cited by:

    1. Peter Abelson & Tim Dalton, 2018. "Choosing the Social Discount Rate for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 52-67, March.
    2. Wu, Dan & Aye, Lu & Ngo, Tuan & Mendis, Priyan, 2017. "Optimisation and financial analysis of an organic Rankine cycle cooling system driven by facade integrated solar collectors," Applied Energy, Elsevier, vol. 185(P1), pages 172-182.
    3. Jean-François Mertens & Anna Rubinchik, 2017. "Discounting and welfare evaluation of policies," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(5), pages 903-920, October.
    4. Li, Qingran & Pizer, William A., 2021. "Use of the consumption discount rate for public policy over the distant future," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    5. James Broughel & Andrew Baxter, 2022. "A Mortality Risk Analysis for OSHA’s COVID-19 Emergency Regulations," JRFM, MDPI, vol. 15(10), pages 1-21, October.
    6. Novikova, Tatyana S., 2022. "Investments in research infrastructure on the project level: Problems, methods and mechanisms," Evaluation and Program Planning, Elsevier, vol. 91(C).
    7. Abdallah Othman & Glenn P. Jenkins & Mikhail Miklyaev, 2022. "Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique," Development Discussion Papers 2022-04, JDI Executive Programs.
    8. Broughel, James, 2021. "Rehabilitating the Opportunity Cost of Capital in Cost–Benefit Analysis," Working Papers 11433, George Mason University, Mercatus Center.
    9. Spackman, Michael, 2023. "The social discount rate and the cost of public funds: a search for more consistency and better practice," LSE Research Online Documents on Economics 119814, London School of Economics and Political Science, LSE Library.
    10. Monika Foltyn-Zarychta & Rafał Buła & Krystian Pera, 2021. "Discounting for Energy Transition Policies—Estimation of the Social Discount Rate for Poland," Energies, MDPI, vol. 14(3), pages 1-21, January.

    More about this item

    Keywords

    Social discount rate; benefit-cost analysis; opportunity cost; time preference;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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