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Discounting disentangled

Author

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

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

  • Drupp, Moritz A. & Freeman, Mark C. & Groom, Ben & Nesje, Frikk, 2018. "Discounting disentangled," LSE Research Online Documents on Economics 87375, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:87375
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    File URL: http://eprints.lse.ac.uk/87375/
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    References listed on IDEAS

    as
    1. Necker, Sarah, 2014. "Scientific misbehavior in economics," Research Policy, Elsevier, vol. 43(10), pages 1747-1759.
    2. 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.
    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. Pierre-Philippe Combes & Laurent Linnemer, 2010. "Inferring Missing Citations: A Quantitative Multi-Criteria Ranking of all Journals in Economics," Working Papers halshs-00520325, HAL.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Social discount rate; project appraisal; expert opinions; simple Ramsey Rule; disagreement;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • 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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