More appropriate discounting: the rate of social time preference and the value of the social discount rate

Moore Mark A. (), Anthony Boardman and Aidan Vining
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Moore Mark A.: Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada

Journal of Benefit-Cost Analysis, 2013, vol. 4, issue 1, 1-16

Abstract: Recently, a number of authors, including Burgess and Zerbe, have recommended the use of a real social discount rate (SDR) in the range of 6–8% in benefit-cost analysis (BCA) of public projects. They derive this rate based on the social opportunity cost of capital (SOC) method. In contrast, this article argues that the correct method is to discount future impacts based on the rate of social time preference (STP). Flows in or out of private investment should be multiplied by the shadow price of capital (SPC). Using this method and employing recent United States data, we obtain an estimate of the rate of STP of 3.5% and an SPC of 2.2. We also re-estimate the SDR using the SOC method and conclude that, even if analysts continue to use this method, they should use a considerably lower rate of about 5%.

Keywords: benefit-cost analysis; social discount rate; social opportunity cost of capital; social time preference (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (18)

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DOI: 10.1515/jbca-2012-0008

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