Estimation of a social discount rate for Turkey

Abstract

Cost-benefit analysis is probably the most comprehensive method of economic evaluation for public projects. Social discount rate, which makes it possible to compare the social benefits and costs extended over a period of time, has a key role in the allocation of public resources between alternative ends via cost-benefit analysis. Public sector needs to use the correct social discount rate in order to achieve a fair allocation of the fiscal burden between generations. While a high social discount rate may place a heavy fiscal burden on future generations, a low social discount rate may cause unfeasible projects to be approved. However, although social discount rate is a crucial parameter for public project appraisals, there is a lack of updated social discount rate for Turkey. In this study, the social rate of time preference approach is used to estimate this social discount rate. To this aim, both the personal taxation and the food demand methods are employed in order to estimate the elasticity of the marginal utility of consumption, which is a critical determinant of the social rate of time preference based on the Ramsey formula. The overall results show that the social discount rate estimated using the personal tax method is 4.88%, whereas it is 4.41% using the food demand method. Since the level of tax evasion is very high in Turkey, we recommend that the value indicated by the food demand method should be used employing the autoregressive distributed lag cointegration procedure.