The simple answer to the Social Discount Rate question

Szekeres, Szabolcs (2023): The simple answer to the Social Discount Rate question.

Abstract

The Social Time Preference Rate (STPR) correctly measures the rate of fall of the value of future benefits, while the Social Opportunity Cost Rate (SOCR) correctly measures the cost of capital of investment projects, but neither rate can correctly compute net present values (NPV) by itself. This paper shows that there is no choice, both must be used simultaneously, a method that is equivalent to shadow pricing capital. This reconciles the two approaches, as their joint use satisfies both of their requirements. Disagreements will remain, however, as reviewed in the paper, about the value of both rates.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social discount rate; Prescriptive discounting; Descriptive discounting; Two-rate discounting; Declining discount rates; Ramsey rule.
• Subjects: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation ; Social Discount Rate

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