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Discounting Disentangled

Author

Listed:
  • Moritz A. Drupp
  • Mark C. Freeman
  • Ben Groom
  • Frikk Nesje

Abstract

The economic values of investing in long-term public projects are highly sensitive to the social discount rate (SDR). We surveyed over 200 experts to disentangle disagreement on the risk-free SDR into its component parts, including pure time preference, the wealth effect and return to capital. We show that the majority of experts do not follow the simple Ramsey Rule, a widely-used theoretical discounting framework, when recommending SDRs. Despite disagreement on discounting procedures and point values, we obtain a surprising degree of consensus among experts, with more than three-quarters finding the median risk-free SDR of 2 percent acceptable.

Suggested Citation

  • Moritz A. Drupp & Mark C. Freeman & Ben Groom & Frikk Nesje, 2018. "Discounting Disentangled," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 109-134, November.
  • Handle: RePEc:aea:aejpol:v:10:y:2018:i:4:p:109-34
    Note: DOI: 10.1257/pol.20160240
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    References listed on IDEAS

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    1. 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.
    2. Pierre-Philippe Combes & Laurent Linnemer, 2010. "Inferring Missing Citations: A Quantitative Multi-Criteria Ranking of all Journals in Economics," Working Papers halshs-00520325, HAL.
    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.
    4. Necker, Sarah, 2014. "Scientific misbehavior in economics," Research Policy, Elsevier, vol. 43(10), pages 1747-1759.
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    More about this item

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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