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

Author

Listed:
  • 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. Chelli, Alessia & Brander, Luke & Geneletti, Davide, 2025. "Cost-Benefit analysis of urban nature-based solutions: A systematic review of approaches and scales with a focus on benefit valuation," Ecosystem Services, Elsevier, vol. 71(C).
    2. Spackman, Michael, 2021. "Social discounting and the cost of public funding in practice," LSE Research Online Documents on Economics 111490, London School of Economics and Political Science, LSE Library.
    3. Tao, Cheng & Rong, Ximin & Zhao, Hui, 2025. "Target benefit pension with longevity risk and stochastic interest rate valuation," Insurance: Mathematics and Economics, Elsevier, vol. 120(C), pages 285-301.
    4. 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.
    5. repec:jpe:journl:1663 is not listed on IDEAS
    6. Broughel, James, 2021. "Rehabilitating the Opportunity Cost of Capital in Cost–Benefit Analysis," Working Papers 11433, George Mason University, Mercatus Center.
    7. Gabriella Maselli & Antonio Nesticò, 2021. "The Role of Discounting in Energy Policy Investments," Energies, MDPI, vol. 14(19), pages 1-18, September.
    8. Anthony E. Boardman & Mark Moore & Aidan Vining, 2020. "Financing and Funding Approaches for Establishment, Governance and Regulatory Oversight of the Canadian Northern Corridor," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 13(25), October.
    9. Aidan R. Vining & David L. Weimer, 2019. "The Value of High School Graduation in the United States: Per-Person Shadow Price Estimates for Use in Cost–Benefit Analysis," Administrative Sciences, MDPI, vol. 9(4), pages 1-15, October.
    10. 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.
    11. 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.
    12. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2021. "Discounting Environmental Benefits for Future Generations," Public Finance Review, , vol. 49(1), pages 41-70, January.
    13. Tamai, Toshiki, 2023. "The rate of discount on public investments with future bias in an altruistic overlapping generations model," European Journal of Political Economy, Elsevier, vol. 79(C).
    14. 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.
    15. Akbulut, Hale & Seçilmiş, Erdem, 2019. "Estimation of a social discount rate for Turkey," Socio-Economic Planning Sciences, Elsevier, vol. 67(C), pages 78-85.
    16. 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.
    17. Hedi Katre Kriit & Johan Nilsson Sommar & Stefan Åström, 2024. "Socioeconomic per-case costs of stroke, myocardial infarction, and preterm birth attributable to air pollution in Sweden," PLOS ONE, Public Library of Science, vol. 19(1), pages 1-15, January.
    18. Alejandro Nin Pratt & Eduardo Magalhaes, 2018. "Revisiting Rates of Return to Agricultural R&D Investment," Working Papers id:12723, eSocialSciences.
    19. 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.
    20. Jinchi Dong & Richard S. J. Tol & Fangzhi Wang, 2024. "Towards a representative social cost of carbon," Papers 2404.04989, arXiv.org.
    21. Solow, Andrew R. & Farrow, Scott, 2024. "Li and Pizer in the short-run: A comment on discounting," Journal of Environmental Economics and Management, Elsevier, vol. 127(C).

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