Measuring the US social discount rate

Abstract

The purpose of this letter is to estimate the US social discount rate, the appropriate discount rate for public capital budgets. There are two methods. One assumes that public investment displaces private consumption, and the discount rate is labelled the social rate of time preference (SRTP). The other assumes that public investment crowds out private investment, and the underlying social discount rate is market-based. The approach in this letter follows the second method. It relies on wealth maximization with the presence of two assets: one risky and one riskless. The risky security is taken to be a portfolio of common stocks, while the riskless asset is taken to be the T-bill rate. The Euler or first-order condition is independent of initial wealth. Because of that the estimate of the discount rate applies to all unanimously, and can be considered a social rate by essence. The range of the estimated social discount rate is between 5.01% and 6.17%, and the 95% confidence interval for the inferred population mean discount rate is between 5.62% and 5.71%. These results are extremely precise and reasonable, and are at the upper limit of the estimates in the literature that use a completely different approach.

A social discount rate for Turkey

“…The financial discount rate for 30 year projects is 2.8% based on 1979-2008 average. Florio (2006) provides a fruitful discussion on this approach; iii) Trade-offs in financial markets approach which measures the SDR as the opportunity cost of private investment instead of consumption under perfect markets assumption; see for example, Azar (2007).…”

The Politics of Cost–Benefit Analysis

“…For instance, Ramsey (1928, p. 543) states: "it is assumed that we do not discount later enjoyments in comparison with earlier ones, a practice which is ethically indefensible and arises merely from the weakness of the imagination". Various descriptive scholars contest the prescriptive approach by arguing that selecting a social discount rate that is (substantially) lower than the market interest rate would leave future generations worse off, because a low rate diverts financial resources from better use, creating an inefficient allocation of funds (Azar, 2007;Nordhaus, 2007). Moreover, descriptivists criticize prescriptive approach supporters, charging them of elitism (e.g., Anthoff et al, 2009).…”

The Valuation of Public Projects: Risks, Cost of Financing and Cost of Capital Current

“…It is undeniable that the public sector can generally borrow at lower interest rates than the private sector. But why is the cost of financing lower for a public-sector enterprise if it is involved in the same activities and in the same way as a private-sector company -same technology, same inputs, same 1 Recent books, articles and studies including, among many others, Gollier (2011), Burgess and Jenkins (2010), Harrison (2010), Sick (2009), Boardman, Moore and Vining (2010), Lopez (2008), Azar (2007), Montmarquette and Scott (2007), Caplin and Leahy (2004), Young (2002), Dasgupta, Mäler and Barrett (2000) and Pearce and Ulph (1995) reflect this unabated and steadily renewed interest in the relations between risks and social discount rates for public project evaluation.…”