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Discounting disentangled: an expert survey on the determinants of the long-term social discount rate

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  • Moritz Drupp
  • Mark Freeman
  • Ben Groom
  • Frikk Nesje

Abstract

We present evidence from a survey of 197 experts on the determinants of the long-term social discount rate (SDR). The survey disentangles central discounting concepts and components. Alongside forecasts of real risk-free interest rates and experts’ recommended SDRs, we elicit responses on the individual parameters of the Ramsey Rule’s social rate of time preference: the elasticity of marginal utility of consumption, the pure rate of time preference, and a prediction of long-term per capita consumption growth. Obtaining disentangled data such as these is crucial because appropriate guidance on the SDR depends on how heterogeneous recommendations and forecasts on the SDR’s determinants are combined. We find a mean (median) recommended long-term SDR of 2.25% (2%) and characterise empirical distributions of all other determinants. Besides providing this necessary raw data, which may also prove useful in other fields, we obtain three key results. First, while there is considerable disagreement on point SDRs, 92% of experts are comfortable with SDRs somewhere in the interval of 1% to 3%. Second, we find that the simple Ramsey Rule cannot predict the responses of the majority of experts. In fact, 81% of experts do not recommend a SDR equal to the Ramsey Rule’s social rate of time preference. Furthermore, the SDR responses of only 25% of experts match their forecasted interest rates. This indicates that the prominence of the Ramsey Rule in policy guidance should be revisited. Finally, the rich body of qualitative responses we received underscores the more complex nature of social discounting. Among others, experts point to issues such as uncertainty, heterogeneity, relative price effects and alternative ethical approaches that policy guidance on social discounting should consider. Overall, our findings lead us to the conclusion that current policy guidance concerning social discounting and the evaluation of long-term public projects needs to be updated. This applies among others to the UK Treasury’s Green Book and the Assessments of the Intergovernmental Panel on Climate Change.

Suggested Citation

  • Moritz Drupp & Mark Freeman & Ben Groom & Frikk Nesje, 2015. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate," GRI Working Papers 196a, Grantham Research Institute on Climate Change and the Environment.
  • Handle: RePEc:lsg:lsgwps:wp196a
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    References listed on IDEAS

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    Cited by:

    1. Pindyck, Robert S., 2019. "The social cost of carbon revisited," Journal of Environmental Economics and Management, Elsevier, vol. 94(C), pages 140-160.
    2. Antony Millner & Geoffrey Heal, 2014. "Resolving intertemporal conflicts: Economics vs. Politics," GRI Working Papers 173, Grantham Research Institute on Climate Change and the Environment.
    3. Howard, Peter H. & Sylvan, Derek, 2015. "The Economic Climate: Establishing Consensus on the Economics of Climate Change," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205761, Agricultural and Applied Economics Association.
    4. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent longterm social discount rate?," LSE Research Online Documents on Economics 67258, London School of Economics and Political Science, LSE Library.
    5. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    6. repec:bla:econom:v:84:y:2017:i:335:p:345-364 is not listed on IDEAS
    7. Antony Millner, 2016. "Heterogeneous intergenerational altruism," GRI Working Papers 226, Grantham Research Institute on Climate Change and the Environment.
    8. repec:eee:jeeman:v:85:y:2017:i:c:p:35-61 is not listed on IDEAS
    9. Antony Millner & Geoffrey Heal, 2015. "Collective intertemporal choice: time consistency vs. time invariance," GRI Working Papers 220, Grantham Research Institute on Climate Change and the Environment.
    10. Baumgärtner, Stefan & Drupp, Moritz A. & Meya, Jasper N. & Munz, Jan M. & Quaas, Martin F., 2016. "Income inequality and willingness to pay for public environmental goods," Economics Working Papers 2016-04, Christian-Albrechts-University of Kiel, Department of Economics.

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