Answering the social discount rate question

Szabolcs Szekeres

MPRA Paper from University Library of Munich, Germany

Abstract: Discounting project net flows with prescriptive rates fails to reflect costs of capital; discounting them with descriptive rates fails to reflect intertemporal preferences. A two-rate discounting method is described by which a descriptive rate is used to forecast costs of capital and a prescriptive rate is used to discount the all-inclusive net benefit flow. Using this method is the equivalent of discounting with the social time preference rate (SPTR) after having adequately shadow-priced investments, which satisfies in full the requirements of both discounting approaches. It also results in an easy to apply rule: for projects to be economically feasible their IRR should exceed both the STPR and the social opportunity cost rate (SOCR). The long-standing social discount-rate dilemma is thus solved, for in fact there is no choice. Both rates must be used. An agent-based capital market model with multiple actors and two financial instruments, one of them stochastic, illustrates and provides additional insights.

Keywords: social discount rate; prescriptive discounting; descriptive discounting; two-rate discounting; declining discount rates; Ramsey rule (search for similar items in EconPapers)
JEL-codes: D61 H3 (search for similar items in EconPapers)
Date: 2022-11-24
New Economics Papers: this item is included in nep-ppm
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Citations: View citations in EconPapers (4)

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