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The Economic Opportunity Cost of Capital for Canada - An Empirical Update

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Author Info
Glenn Jenkins () (Queen's University, Kingston, On, Canada)
Chun-Yan Kuo () (Queen's University, Kingston, On, Canada)

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Abstract

The social or economic discount rate is the threshold rate used to calculate the net present value of an investment project, a program, or a regulatory intervention to see whether the proposed expenditures are economically worthwhile to undertake. The size of the economic rate of discount has been a policy issue in Canada for many years. The debate has been primarily concerned with the empirical measurement of the economic opportunity cost of funds. The purpose of this paper is to reexamine and update the empirical estimation of what is the appropriate economic discount rate for Canada. The results suggest that estimates of the economic discount rate can range from 7.78 percent to 8.39 percent real. As a consequence, we conclude that for Canada an 8 percent real rate is an appropriate discount rate to use when calculating the economic net present value of the flows of economic benefits and costs over time.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1133.pdf
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1133.

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Length: 25 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:qed:wpaper:1133

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Postal: Kingston, Ontario, K7L 3N6
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Related research
Keywords: discount rates; opportunity cost; project evaluation;

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Find related papers by JEL classification:
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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References listed on IDEAS
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  1. Glenn P. Jenkins, 1981. "The Public-Sector Discount Rate for Canada: Some Further Observations," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 399-407, Summer. [Downloadable!] (restricted)
  2. Sandmo, Agnar & Dreze, Jacques H, 1971. "Discount Rates for Public Investment in Closed and Open Economies," Economica, London School of Economics and Political Science, vol. 38(152), pages 395-412, November. [Downloadable!] (restricted)
  3. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 513-47, June. [Downloadable!] (restricted)
  4. Harberger, Arnold C & Wisecarver, Daniel L, 1977. " Private and Social Rates of Return to Capital in Uruguay," Economic Development and Cultural Change, University of Chicago Press, vol. 25(3), pages 411-45, April.
  5. David Burgess, 2008. "Removing Some Dissonance From the Social Discount Rate Debate," University of Western Ontario, RBC Financial Group Economic Policy Research Institute Working Papers 20082, University of Western Ontario, RBC Financial Group Economic Policy Research Institute. [Downloadable!]
  6. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April. [Downloadable!] (restricted)
  7. David F. Burgess, 1981. "The Social Discount Rate for Canada: Theory and Evidence," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 383-394, Summer. [Downloadable!] (restricted)
  8. Glenn Jenkins & JOHN EVANS, 1980. "The Cost Of U.S. Direct Foreign Investment," Development Discussion Papers 1980-1, JDI Executive Programs. [Downloadable!]
  9. Glenn Jenkins, 1973. "The Measurement Of Rates Of Return And Taxation From Private Capital In Canada," Development Discussion Papers 1973-2, JDI Executive Programs. [Downloadable!]
  10. Chun-Yan Kuo & Glenn P. Jenkins & M. Benjamin Mphahlele, 2003. "The Economic Opportunity Cost Of Capital In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(3), pages 523-543, 09. [Downloadable!] (restricted)
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