Abstract
This paper is focused on searching for the suitable discount rate to be applied to the valuation of a project related to forests in the USA, e.g., a recreational area inside a national park. To do this, we propose a new model based on hazard rate concepts, i.e., based on the risk that waiting time implies. More specifically, we derive the discount function whose instantaneous discount rate is the hazard rate of the system supporting the investment. We determine the rate of failure corresponding to different partition criteria of the whole system; in our case, we can use the information on forest fires caused in different ways, in different states or in different types of forest surfaces. After showing independence between the forest fires by states and causes, we derive a specific discount function for each cause which can be applied to every state or set of states which agree to fight against a concrete cause of forest fire. Additionally, we obtain a unique discount function by weighting the partial discount functions by type of forest surfaces. Our results are in line with the recommendations from several authors about using decreasing discount rates for projects with very long-term impacts.
Highlights
When we face the problem of valuing a public project, there are two important problems to deal with
In [3], we find an interesting application of this opportunity cost of capital method to obtain an appropriate social discount rate to appraise public forestry investments
There are interesting proposals of risk-adjusted social discount rates [19,21] which build on the Weitzman approach [22,23] consisting of a linear decomposition of the project returns into one part that is correlated with the overall economic activity, and another part that is independent of it, having as a result discount rates declining over time at a rate which depends on the portion of covariant risk
Summary
When we face the problem of valuing a public project, there are two important problems to deal with. The UK Green Book [9] proposes a SDR of 3.5% (based on the calculation of the social time preference rate) It establishes a decreasing sequence of rates for projects with very long-term impacts (more than 30 years), and the circumstances where exceptions to the recommended rates are allowed. In the appraisal of very long-term projects, like environmental projects, with impacts on future generations, several authors have proposed time declining discount rates Against this single rate hegemony, dissident voices have been raised for many years. There are interesting proposals of risk-adjusted social discount rates [19,21] which build on the Weitzman approach [22,23] consisting of a linear decomposition of the project returns into one part that is correlated with the overall economic activity, and another part that is independent of it, having as a result discount rates declining over time at a rate which depends on the portion of covariant risk.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
