“Just give me a number!” Practical values for the social discount rate
A major reason the quality of cost-benefit analysis (CBA) varies widely is inconsistent use of the social discount rate (SDR). This article offers guidance about the choice of the SDR. Namely, we recommend the following procedures: If the project is intragenerational (does not have effects beyond 50 years) and there is no crowding out of private investment, then discount all flows at 3.5 percent; if the project is intragenerational and there is some crowding out of investment, then weight investment flows by the shadow price of capital of 1.1 and then discount at 3.5 percent; if the project is intergenerational and there is no crowding out of investment, then use a time-declining scale of discount rates; if the project is intergenerational and investment is crowded out, then convert investment flows during the first 50 years to consumption equivalents using a shadow price of 1.1, and then discount all of these flows at 3.5 percent, and discount all flows after the 50th year using time-declining rates. We then compare current discounting practices of U.S. federal agencies with our estimates. Consistent use of the recommended rates would eliminate arbitrary choices of discount rates and would lead to better public sector decision-making. © 2004 by the Association for Public Policy Analysis and Management.
Volume (Year): 23 (2004)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/journal/34787/home|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin L. Weitzman, 2001.
American Economic Review,
American Economic Association, vol. 91(1), pages 260-271, March.
- Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
- Jeffrey A. Kolb & Joel D. Scheraga, 1990. "Discounting the benefits and costs of environmental regulations," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 9(3), pages 381-390.
- George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
- Bradford, David F, 1975. "Constraints on Government Investment Opportunities and the Choice of Discount Rate," American Economic Review, American Economic Association, vol. 65(5), pages 887-99, December.
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Hartman, Robert W., 1990. "One thousand points of light seeking a Issue: A case study of CBO's search for a discount rate policy," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S3-S7, March.
- Jonathan A. Lesser & Richard O. Zerbe, 1995. "What Can Economic Analysis Contribute To The 'Sustainability' Debate?," Contemporary Economic Policy, Western Economic Association International, vol. 13(3), pages 88-100, 07.
- Cropper, Maureen L & Aydede, Sema K & Portney, Paul R, 1992. "Rates of Time Preference for Saving Lives," American Economic Review, American Economic Association, vol. 82(2), pages 469-72, May.
- Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004.
"Do the Rich Save More?,"
Journal of Political Economy,
University of Chicago Press, vol. 112(2), pages 397-444, April.
- Karen E. Dynan & Jonathan Skinner & Stephen Zeldes, 2000. "Do the rich save more?," Finance and Economics Discussion Series 2000-52, Board of Governors of the Federal Reserve System (U.S.).
- Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000. "Do the Rich Save More?," NBER Working Papers 7906, National Bureau of Economic Research, Inc.
- Azfar, Omar, 1999. "Rationalizing hyperbolic discounting," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 245-252, February.
- David Laibson, 1997.
"Golden Eggs and Hyperbolic Discounting,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 112(2), pages 443-478.
- Pizer, William & Newell, Richard, 2000.
"Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?,"
dp-00-45, Resources For the Future.
- Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
- Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
- Simon Grant & John Quiggin, 2003. "Public Investment and the Risk Premium for Equity," Economica, London School of Economics and Political Science, vol. 70(277), pages 1-18, February.
- Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
- Schelling, Thomas C, 1995. "Intergenerational discounting," Energy Policy, Elsevier, vol. 23(4-5), pages 395-401.
- 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.
- Lind, Robert C, 1995. "Intergenerational equity, discounting, and the role of cost-benefit analysis in evaluating global climate policy," Energy Policy, Elsevier, vol. 23(4-5), pages 379-389.
- Manne, Alan S, 1995. "The rate of time preference : Implications for the greenhouse debate," Energy Policy, Elsevier, vol. 23(4-5), pages 391-394.
When requesting a correction, please mention this item's handle: RePEc:wly:jpamgt:v:23:y:2004:i:4:p:789-812. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.