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“Just give me a number!” Practical values for the social discount rate
Author(s) -
Moore Mark A.,
Boardman Anthony E.,
Vining Aidan R.,
Weimer David L.,
Greenberg David H.
Publication year - 2004
Publication title -
journal of policy analysis and management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.898
H-Index - 84
eISSN - 1520-6688
pISSN - 0276-8739
DOI - 10.1002/pam.20047
Subject(s) - social discount rate , shadow price , economics , discounting , investment (military) , consumption (sociology) , crowding out , time preference , shadow (psychology) , microeconomics , capital budgeting , actuarial science , cost–benefit analysis , monetary economics , project appraisal , finance , social science , psychology , ecology , mathematical optimization , mathematics , sociology , politics , political science , law , psychotherapist , biology
A major reason the quality of cost‐benefit analysis (CBA) varies widely is inconsistent use of the social discount rate (SDR). This article offers guidance about the choice of the SDR. Namely, we recommend the following procedures: If the project is intragenerational (does not have effects beyond 50 years) and there is no crowding out of private investment, then discount all flows at 3.5 percent; if the project is intragenerational and there is some crowding out of investment, then weight investment flows by the shadow price of capital of 1.1 and then discount at 3.5 percent; if the project is intergenerational and there is no crowding out of investment, then use a time‐declining scale of discount rates; if the project is intergenerational and investment is crowded out, then convert investment flows during the first 50 years to consumption equivalents using a shadow price of 1.1, and then discount all of these flows at 3.5 percent, and discount all flows after the 50th year using time‐declining rates. We then compare current discounting practices of U.S. federal agencies with our estimates. Consistent use of the recommended rates would eliminate arbitrary choices of discount rates and would lead to better public sector decision‐making. © 2004 by the Association for Public Policy Analysis and Management.