Social Discount Rate Research Articles

The Effect of Employing Hyperbolic Social Discount Rate onto the Economic Feasibility Test for Free Trade Zone Development Project

The Effect of Employing Hyperbolic Social Discount Rate onto the Economic Feasibility Test for Free Trade Zone Development Project

The Social Rate of Discount, Climate Change and Real Options

This paper examines the controversial problem of the choice of the social discount rate in development projects, by focusing on the investment required to adapt to climate change, considering the threats to food security and the needs for human and natural capital, especially for developing countries. Because climate change introduces negative trends and time increasing volatilities both in production and in consumption, social rates of discount can only be estimated within a framework of dynamic uncertainty. For this purpose, climate change can be modeled as a twin stochastic process of the geometric Brownian motion variety, affecting both consumption and productive capacity. Unlike the case of deterministic neoclassical growth, and contrary to the usual estimates for project evaluation, the stochastic nature of climate changes links the social discount rate (SDR) to volatility in two distinct and important ways. On the side of consumption and growth, the SDR is reduced by the likely negative effects of climate change (CC) on growth and food security. It also becomes dependent on the fact that the volatility of growth favors the accumulation of precautionary savings and thus reduces the rate of fall of the value of consumption over time. On the side of production capacity, the SDR is also reduced by the negative effect of CC on the productivity of capital and by the fact that the opportunity cost of the displacement of private investment under dynamic uncertainty is lowered by the value of the options to invest when more information will be available.

Discount Rates for Long-Term Projects: The Cost of Capital and Social Discount Rate Compared

Discount Rates for Long-Term Projects: The Cost of Capital and Social Discount Rate Compared

Determination of the fair value of a multifunctional family farm: a case study

The article analyses the problems of the determination of the fair value of a multifunctional family farm using the method of discounted cash flow, presents a model of determination of the fair value of a multifunctional family farm and tests it for a selected family farm. The specificity of the cash flows in a multifunctional family farm is related to the cash flows from financial support, different value drivers of the earnings before interests and tax and their calculation methodology, and the value of created public goods and externalities. Two types of discount rates are used to determine the value of a family farm: marketbased and social discount rate (SDR). It is appropriate to use the SDR to discount the cash flow of investment, the economic and social benefits whereof are distributed among present and future generations. The stages of the determination of the fair value of a farmer’s farm include: value drivers’ decomposition; differentiation of cash flow and discount rates and measuring value drivers; forecasting cash flow and discount rate value drivers; value drivers’ composition; determination of the terminal value; and cash flow discounting.

The choice of the social discount rate and the opportunity cost of public funds

The decades-old literature on the correct method for choosing and estimating a social discount rate (SDR) has resulted in two, largely opposing viewpoints. This note seeks to clarify the key sources of disagreement between these two camps. One view advocates that the choice should be based chiefly on the social opportunity cost of the return to foregone private capital investment (SOC), and suggests a SDR of around 7%. The other viewpoint, expressed by the authors, argues that the choice should be based on the social rate of time preference (STP), the rate at which society is willing to trade present for future consumption, suggesting a SDR of around 3.5%. Because of the fundamentally normative basis of the SDR choice, neither approach generates testable hypotheses that would allow falsification. For government project evaluation, the choice ultimately depends on the opportunity cost of public funds, which in turn depends on how fiscal policy actually operates. The STP approach contends that governments set targets for deficits and public debt, so that a marginal government project will be tax-financed, largely crowding out current consumption. The SOC belief is that governments set revenue targets, so that any government project will be deficit-financed on the margin, which will largely crowd out private investment. The authors also argue that a SDR based on the STP approach is appropriate for: benefit-cost analysis of government regulations, self-financing government projects, and government cost-effectiveness studies.

The Effect of Social Discount Rate Manipulation on the Economic Feasibility Tests: Focusing on the Environmental Public Investment Projects

The Effect of Social Discount Rate Manipulation on the Economic Feasibility Tests: Focusing on the Environmental Public Investment Projects

A study on the Effect of Social Discount Rate Change on the Results of Benefit-Cost Analysis: Focused on cases of the Pre-feasibility Study in Korea

A study on the Effect of Social Discount Rate Change on the Results of Benefit-Cost Analysis: Focused on cases of the Pre-feasibility Study in Korea

On the Social Discount Rate of Climate Change Economics: A Stochastic Discount Factor Model Perspective

On the Social Discount Rate of Climate Change Economics: A Stochastic Discount Factor Model Perspective

More appropriate discounting: the rate of social time preference and the value of the social discount rate

Recently, a number of authors, including Burgess and Zerbe, have recommended the use of a real social discount rate (SDR) in the range of 6–8% in benefit-cost analysis (BCA) of public projects. They derive this rate based on the social opportunity cost of capital (SOC) method. In contrast, this article argues that the correct method is to discount future impacts based on the rate of social time preference (STP). Flows in or out of private investment should be multiplied by the shadow price of capital (SPC). Using this method and employing recent United States data, we obtain an estimate of the rate of STP of 3.5% and an SPC of 2.2. We also re-estimate the SDR using the SOC method and conclude that, even if analysts continue to use this method, they should use a considerably lower rate of about 5%.

The Role of the Discount Rate in Cost–Benefit Analysis Between Theory and Practice: A Comparative Survey

This study focuses on the role of the discount rate in cost–benefit analysis (CBA) of regulation, providing a systematic investigation into regulatory practice vis–à–vis the existing economic theories. In the first part, a quick survey of the main economic literature on the social discount rate (SDR) is presented. In the second part, the current institutional practice is investigated, firstly comparing the recommendations on discounting issued by institutional actors in the US (Office of Management Budget, Environmental Protection Agency) and the EU (Commission), and secondly examining the SDRs adopted in two samples of CBAs selected among Regulatory Impact Analyses of US EPA and Impact Assessments of EU Directorate–General for the Environment. A gap exists between economic theory and institutional practice in the selection of the SDR. Regulatory decisions which are based on CBA reflect the most workable economic literature on discounting rather than the most theoretically consistent one, thus yielding less reliable and less robust results. Scholars who aim at improving the quality of rule–making and at fostering the application of CBA in regulatory decisions should improve the “operational validity” of their research, thus providing practitioners with methods that are both consistent and workable.

Energy Policy and the Social Discount Rate

Recent debates over the economics of climate change underscore the importance of what at first blush is a narrow technical issue in welfare economics and cost-benefit analysis (CBA). Yet even befor...

Approaches to Measuring Social Discount Rate: A Bangladesh Perspective

Social discount rate (SDR) reflects a society’s relative valuation on today’s well-being versus well-being in the future. This paper reviews various methods of measuring social discount rate, with particular emphasis on Social Rate of Time Preference (SRTP) and Social Opportunity Cost of Capital (SOC) framework. The author then employs Monte Carlo Simulation to calculate SRTP value for Bangladesh followed by one using SOC framework. The final result suggests that the Government of Bangladesh should use a value between 9-11% as optimal Social Discount Rate for various long term projects. The discount rate is similar to the ones used by Government of Pakistan, India and China

Comment on Burgess and Zerbe: On Bank Market Power and the Social Discount Rate

In this note we discuss how to estimate the social discount rate when banks have market power. Some data from Sweden are used to illustrate the approach. If other investments are crowded out, the implied social discount rate is around 7 percent, i.e. more or less equal to the one suggested by Burgess and Zerbe (2011) for the U.S. but similar to those often used in the EU (3-4 percent) if private consumption is crowded out by the considered investment.

A social discount rate for Turkey

Social discount rate (SDR) is a very crucial policy parameter in public project appraisals due to its resource allocation impacts. If this rate is too high, future generations will face excess financial burden since distant cash flows will become negligible. If this rate is too low, ineffective projects are chosen creating an inefficient allocation of resources. This study estimates an SDR for Turkey using the social time preference rate (STPR) approach. The elasticity of the marginal utility consumption, which is the most important component of the STPR, is estimated econometrically from a demand for food approach during the period of 1980–2008. The overall result indicates that the SDR for Turkey is 5.06%. The European Union requires evaluation of the publicly supported commercial projects in terms of the SDR; hence the findings from this study can be used as a useful policy measurement for a full EU member candidate country, Turkey.

The Social Discount Rate Under Intertemporal Risk Aversion and Ambiguity

The social discount rate crucially determines optimal mitigation policies. This paper examines two shortcomings of the recent debate and the models on climate change assessment. First, removing an implicit assumption of (intertemporal) risk neutrality reduces the growth effect in social discounting and significantly amplifies the importance of risk and correlation. Second, debate and models largely overlook the difference in attitude with respect to risk and with respect to non-risk uncertainty. The paper derives the resulting changes of the risk-free and the stochastic social discount rate and points out the importance of even thin tailed uncertainty for climate change evaluation.

Research on the Social Discount Rate for the Whole Life Cycle Engineering Cost Management

The Whole Life Cycle Engineering Costing Management is an effective method to minimize the cost of an engineering project for the whole life, including the construction period, the operation period and the removal period. In this paper, we divided the Engineering Cost into three parts of labor costs, material costs and machinery costs. We have built a River-influx Model to calculate the social discount rate for the future, based on historical data and using MATLAB software to fit curves. We can then calculate the whole Life Cycle Engineering Cost for the future.

International Variation in Cost–Benefit Analysis of Urban Rail Projects

This paper compares urban rail cost–benefit analysis (CBA) in 11 countries and the region of Hong Kong, China, to understand differences and implications for evaluation outcomes and to highlight possible CBA improvements. All countries studied used multicriteria analysis and examined capital, operating, and maintenance costs, and some included asset residual value. Monetized benefits varied, although travel time savings (TTS) were common primary benefits. Several countries also captured TTS for trucks, pedestrians, and cyclists. Accident cost savings (ACC) were common, although unit accident costs varied. For secondary benefits, all countries and regions except Hong Kong and Singapore included environmental externalities. Air pollution and noise impact were common. The United States was unique in including option value, and Germany and the Netherlands were unique in adopting agglomeration benefits. The social discount rate (SDR), assessment period, and decision criteria varied. Most SDRs used the marginal rate of return on private-sector investment (yielding an SDR of 6% to 10%). Net present value was the common decision criterion, and 20 to 30 years was a common evaluation period. Standardized parameter valuations suggested commuting value of time as $5 in Australian dollars per hour (A$5/h) to A$15/h, with an average of A$10/h for public transport users and A$10.50/h for car users. Accident cost varied; fatal accidents cost A$0.1 to A$4.25 million and serious accidents A$60,000 to A$490,000. A case study illustrates implications of adopting approaches with varied outcomes. Only Australia, the United States, the United Kingdom, and the Netherlands had positive benefit–cost ratios (1.00 to 2.61). TTS and congestion relief were major benefits (50% to 60% and 40% to 50%, respectively, of all benefits). ACC, environmental externalities, and option value benefits were not significant. Agglomeration benefits substantially increased project benefits.

Sustainability, Endogenous Social Discount Rate, and Proportional Carbon Tax

Sustainability, Endogenous Social Discount Rate, and Proportional Carbon Tax

The Social Discount Rate for Canada Based on Future Growth in Consumption

Recent interim guidelines of the Treasury Board Secretariat (2007) recommend a social discount rate (SDR) of 8 percent. This paper argues that this value is based on an inappropriate methodology and is too high. Using a consumption rate of interest and drawing on a growth model, we suggest that if a project is intragenerational (less than 50 years) and there is no crowding out of private investment, then analysts should use an SDR of 3.5 percent. Impacts on investment should first be converted to consumption equivalents using a shadow price of capital of 1.26. If the project has intergenerational impacts (beyond 50 years), such as those affecting climate change, we recommend a schedule of time-declining SDRs.

Sustainability, Social Discount Rates and the Selection of Project Procurement Method

The notion of sustainability has lead to the evaluation of public projects in terms of wider socio-economic and environmental benefits. The Cost Benefit Analysis and its respective, Social Discount Rate (SDR), is of crucial importance, especially when the advantages of private financing are to be demonstrated in comparison with the alternative traditional procurement of works and services. The SDR seen as a measure of a country’s value of future costs and benefits is related to the notion of promoted sustainability. The impact of smaller and declining SDRs on project selection is investigated, and a conceptual formulation concerning the selection of the project procurement method is presented. The modelled formulation will assist central and local governments in assessing projects and the potential benefit of private financing.