Social discount rates for the European Union: an overview

Michael Spackman ()

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

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

Keywords: Social discount rates; EU Structural Funds (search for similar items in EconPapers)
JEL-codes: D61 D70 D90 H50 O12 (search for similar items in EconPapers)
Date: 2006-10-31
New Economics Papers: this item is included in nep-pbe
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://wp.demm.unimi.it/files/wp/2006/DEMM-2006_033wp.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to aaa.unimi.it:80 (nodename nor servname provided, or not known) (http://wp.demm.unimi.it/files/wp/2006/DEMM-2006_033wp.pdf [302 Found]--> http://aaa.unimi.it)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mil:wpdepa:2006-33

Access Statistics for this paper

More papers in Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano Via Conservatorio 7, I-20122 Milan - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by DEMM Working Papers ( this e-mail address is bad, please contact ).