Anticipating Costs and Benefits and the Social Discount Rate

Oded Palmon

Canadian Journal of Economics, 1992, vol. 25, issue 2, 453-73

Abstract: When the capital market is distorted, social discount rates and required benefit-cost ratios depend on the adjustments in capital stocks that are induced by undertaking a public project. Assuming that the government cannot set the taxes that induce individuals to choose the socially optimal consumption paths, these adjustments are derived as individuals' optimal consumption/saving choices in a multiperiod framework. Social discount rates are shown to exceed the rate of substitution between consumption in two consecutive periods and to be closer to this rate the longer costs and benefits are anticipated. The optimal timing of undertaking a project is also analyzed.

Date: 1992
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