Should CBA use descriptive or prescriptive discount rates? It should use both!

Szabolcs Szekeres

MPRA Paper from University Library of Munich, Germany

Abstract: Discounting project net flows that exclude financing costs with prescriptive rates fails to reflect costs of capital; discounting them with descriptive rates fails to reflect intertemporal preferences. A hybrid discounting method is proposed whereby descriptive rates are used to forecast costs of capital and prescriptive rates are used to discount all-inclusive net welfare flows. An agent-based capital market model audits the performance of alternative discounting approaches. There is no need to reconcile the discounting approaches. They should be viewed as complementary, not as competing. They are both necessary, and only jointly sufficient to achieve optimality in intertemporal resource allocation.

Keywords: Social discount rate; Prescriptive discounting; Descriptive discounting; Hybrid discounting; Declining discount rates. (search for similar items in EconPapers)
JEL-codes: D61 H43 (search for similar items in EconPapers)
Date: 2021-02-11
New Economics Papers: this item is included in nep-cmp, nep-ore and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:106029

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