IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Social discount rates for the European Union: an overview

  • Michael SPACKMAN

    ()

Registered author(s):

    Time discounting in the public sector remains a source of confusion and some academic controversy. The very concept of a ”social” discount rate, not revealed by the market, is rejected by mainstream financial economics. Elsewhere the setting of public sector discount rates equal to the commercial return on private investment continues to have wide appeal. Both these approaches are flawed. More widely favoured by experts in the field today is a rate derived as the sum of pure time preference for marginal utility and a factor reflecting the decline in marginal utility of income as per capita income increases. However controversy continues about pure time preference, especially in the absence of any empirical data on people’s social (as opposed to individual) preferences. There is empirical evidence from several sources on the income elasticity of marginal utility, but it is very thin, although informed opinion, for developed economies, generally lies today on the range of -1 to -2. The discount rate is also often seen by ministers and officials as an instrument to promote their own national or departmental policy objectives. Further problems arise from confusions between discounting, the government cost of capital, and the rate of return for a public body trading in competitive markets. Within the EU there is much to be said for each Member State establishing its own standard government discount rate for general use, which might in most cases be in the region of 4% to 5% in real terms. However the application of discounting to the very long term is at best contentious. And discounting should not be allowed to divert attention from other, often much more important appraisal assumptions

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://wp.demm.unimi.it/tl_files/wp/2006/DEMM-2006_033wp.pdf
    Download Restriction: no

    Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2006-33.

    as
    in new window

    Length:
    Date of creation: 31 Oct 2006
    Date of revision:
    Handle: RePEc:mil:wpdepa:2006-33
    Contact details of provider: Postal: Via Conservatorio 7, I-20122 Milan - Italy
    Phone: +39 02 50321522
    Fax: +39 02 50321505
    Web page: http://www.demm.unimi.it

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:mil:wpdepa:2006-33. 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: (DEMM Working Papers)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.