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

Published online by Cambridge University Press:  19 January 2015

Mark A. Moore ,
Anthony E. Boardman  and
Aidan R. Vining
Mark A. Moore*
Affiliation:
Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada
Anthony E. Boardman
Affiliation:
Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada
Aidan R. Vining
Affiliation:
Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada
*
Mark A. Moore, Beedie School of Business, Simon Fraser University, 500 Granville St., Vancouver, BC, V6C 1W6, Canada, [email protected]
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Abstract

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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%.

Keywords

benefit-cost analysissocial discount ratesocial opportunity cost of capitalsocial time preference
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 4 , Issue 1 , 28 March 2013 , pp. 1 - 16
Copyright
Copyright © Society for Benefit-Cost Analysis 2013

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