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Social discount rates for the European Union: an overview

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  • Michael SPACKMAN

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Abstract

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

Suggested Citation

  • Michael SPACKMAN, 2006. "Social discount rates for the European Union: an overview," Departmental Working Papers 2006-33, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2006-33
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    File URL: http://wp.demm.unimi.it/files/wp/2006/DEMM-2006_033wp.pdf
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    Cited by:

    1. Y. Biondi, 2011. "Cost of capital, discounting and relational contracting: endogenous optimal return and duration for joint investment projects," Applied Economics, Taylor & Francis Journals, vol. 43(30), pages 4847-4864.

    More about this item

    Keywords

    Social discount rates; EU Structural Funds;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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