Economics at your fingertips  

Public Sector Discount Rates: A Comparison of Alternative Approaches

John Creedy and Hemant Passi ()
Additional contact information
Hemant Passi: The Treasury,

No 17/02, Treasury Working Paper Series from New Zealand Treasury

Abstract: This paper sets out the alternative approaches to the public sector discount rate and explains the assumptions involved. There are two main ways of thinking about the discount rate. First, the social opportunity cost of capital approach (SOC) defines the discount rate as the rate of return that a decision-maker could earn on a hypothetical ‘next best alternative’ to a public investment. Second, the social rate of time preference approach (SRTP) defines the discount rate as the rate of return that a decision-maker requires in order to divert resources from use in the present, to a public investment. In an ‘ideal’ market, these two rates are brought into alignment in equilibrium. However, as there are no markets for public investments, there are no market signals to equate preferences for investing in such projects with rates of return. There is no completely objective way of determining public sector discount rates. Essentially the discount rate reflects how the government values the future when making decisions on behalf of society: value judgements and assumptions are necessary. The paper aims to clarify these judgements. Elements of both approaches may be relevant to many policy and operational decisions that require discounting, in which case different approaches may be relevant for different contexts. The paper also briefly considers the use of hyperbolic discounting.

Keywords: Public sector discount rate; social opportunity cost; social time preference rate (search for similar items in EconPapers)
JEL-codes: H43 H50 (search for similar items in EconPapers)
Date: 2017-06
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link) ... 7/17-02/twp17-02.pdf (application/pdf)

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:

Access Statistics for this paper

More papers in Treasury Working Paper Series from New Zealand Treasury New Zealand Treasury, PO Box 3724, Wellington, New Zealand. Contact information at EDIRC.
Series data maintained by Web and Publishing Team, The Treasury ().

Page updated 2018-03-15
Handle: RePEc:nzt:nztwps:17/02