Resolving the Discounting Dilemma

Szekeres, Szabolcs (2024): Resolving the Discounting Dilemma.

Abstract

Social Time Preference (STP) and Social Opportunity Cost (SOC) discounting differ in their objectives, but STP discounting measures capital costs incorrectly. The two-rate discounting method proposed here corrects this error, which current methods of shadow pricing capital (SPC) don’t. Thereafter project choice discrepancies between alternative methods decrease substantially and the choice between them becomes unambiguous. The SOC rate is the hurdle feasibility rate either way. The marginal cost of public funds (MCF) correction is not an alternative to SPC correction; both must be used in conjunction when warranted. The Ramsey equation is a tautology that cannot predict the STP rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social discount rate; Prescriptive discounting; Descriptive discounting; STP discounting; SOC discounting; Two-rate discounting; Shadow Price of Capital; Marginal Cost of Funds; 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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