The social discount rate in the evaluation of investment projects: an application for Ecuador

Abstract

The standard social discount rate of 12% applied by planning institutions and multilateral agencies when evaluating public projects is a constant administrative parameter that is unsupported and unresponsive to changes in social preferences over time. This paper presents an alternative way of determining the social discount rate based on the gamma estimation model (Weitzman, 2001) in a developing-country context, which has three advantages: (i) it incorporates decreasing discounting, (ii) it is cost-efficient in that it sums up the various expert opinions and (iii) it adjusts for changes in short-and long-term preferences. Our estimates are lower than the standard nominal rate for different time periods, ranging from 2% for evaluation horizons longer than 51 years to 11% for the short term (0-5 years).

Hierarchical Two-Way Sensitivity Analysis in Diverse Benefit Scenario of Matenggeng Dam Feasibility

“…The upper limit of the discount rate is set to be 12%. The 10.08% and 12% of interest rate meet the conventional administrative rate used by Asian Development Bank (Castillo & Zhangallimbay, 2021).…”

An innovative methodology for the assessment of the social discount rate: an application to the European states for ensuring the goals of equitable growth

“…Although the need to use standard and official values for the costs and benefits discounting in the economic analysis is detected to easily compare the outputs related to different initiatives and select the "best" one, the ad hoc quantification of the SDR would avoid wrong discount mechanisms. For example, setting the SDR too high may mean that socially desirable projects are rejected; conversely, setting it too low may result in resources being wasted on economically inefficient projects (Zhuang et al, 2007;Tajani and Morano, 2015;Castillo and Zhangallimbay, 2021).…”