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More appropriate discounting: the rate of social time preference and the value of the social discount rate

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  • Moore, Mark A.
  • Boardman, Anthony E.
  • Vining, Aidan R.

Abstract

Recently, a number of authors, including Burgess and Zerbe, have recommended the use of a real social discount rate (SDR) in the range of 6–8% in benefit-cost analysis (BCA) of public projects. They derive this rate based on the social opportunity cost of capital (SOC) method. In contrast, this article argues that the correct method is to discount future impacts based on the rate of social time preference (STP). Flows in or out of private investment should be multiplied by the shadow price of capital (SPC). Using this method and employing recent United States data, we obtain an estimate of the rate of STP of 3.5% and an SPC of 2.2. We also re-estimate the SDR using the SOC method and conclude that, even if analysts continue to use this method, they should use a considerably lower rate of about 5%.

Suggested Citation

  • Moore, Mark A. & Boardman, Anthony E. & Vining, Aidan R., 2013. "More appropriate discounting: the rate of social time preference and the value of the social discount rate," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(1), pages 1-16, March.
  • Handle: RePEc:cup:jbcoan:v:4:y:2013:i:01:p:1-16_00
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    Cited by:

    1. Therese Grijalva & Jayson Lusk & W. Shaw, 2014. "Discounting the Distant Future: An Experimental Investigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 59(1), pages 39-63, September.
    2. Burgess David F. & Zerbe Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(3), pages 391-400, December.
    3. Akbulut, Hale & Seçilmiş, Erdem, 2019. "Estimation of a social discount rate for Turkey," Socio-Economic Planning Sciences, Elsevier, vol. 67(C), pages 78-85.
    4. A. Mitchell Polinsky & Paul N. Riskind, 2017. "Deterrence and the Optimal Use of Prison, Parole, and Probation," NBER Working Papers 23436, National Bureau of Economic Research, Inc.
    5. Alejandro Nin Pratt & Eduardo Magalhaes, 2018. "Revisiting Rates of Return to Agricultural R&D Investment," Working Papers id:12723, eSocialSciences.
    6. Moore, Mark A. & Boardman, Anthony E. & Vining, Aidan R., 2013. "The choice of the social discount rate and the opportunity cost of public funds," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(3), pages 401-409, December.
    7. Arian Daneshmand & Esfandiar Jahangard & Mahnoush Abdollah-Milani, 2018. "A time preference measure of the social discount rate for Iran," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 7(1), pages 1-10, December.
    8. Vining, Aidan R. & Moore, Mark A., 2017. "Potash ownership and extraction: Between a rock and a hard place in Saskatchewan," Resources Policy, Elsevier, vol. 54(C), pages 71-80.

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