Intergenerational discounting: A case from Hong Kong

Abstract

In debating sustainable development issues such as climate changes and nuclear waste disposal, policymakers usually base their decisions on cost-and-benefit analysis (CBA), which evaluates tradeoffs between costs and benefits spanning over a century. Fundamental to this approach is the choice of an intergenerational discount rate for a society. Observable market rates, however, are mostly available up to 30 years only (e.g. US bonds), which do not necessarily reflect the long-term discount rate for a society to deal with sustainable development. A number of studies have demonstrated that a small change in the discount rate can drastically alter the CBA's outcome. This paper seeks to unveil the market's intergenerational discount rate by analyzing a very “long-lived” and inheritable asset—land property. By examining a mix of lease tenures (50, 75, 99, and 999 years) and their transactions, we found that 999-year property commands a significant premium of 5.74% over 99-year property from 1992 through 2006. The premium implies an intergenerational discount rate of 4.31% p.a. on average, which is significantly lower than the intragenerational discount rate. The discount rate so unveiled would contribute to a more informed intergenerational decision analysis, such as evaluating the cost-effectiveness of environmental legislation and assessing very long-term pollution damages in court. The result also has important implications for real estate valuation practices in China, as all land in Mainland China and Hong Kong is leasehold.