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Answering the social discount rate question

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  • Szekeres, Szabolcs

Abstract

Discounting project net flows with prescriptive rates fails to reflect costs of capital; discounting them with descriptive rates fails to reflect intertemporal preferences. A two-rate discounting method is described by which a descriptive rate is used to forecast costs of capital and a prescriptive rate is used to discount the all-inclusive net benefit flow. Using this method is the equivalent of discounting with the social time preference rate (SPTR) after having adequately shadow-priced investments, which satisfies in full the requirements of both discounting approaches. It also results in an easy to apply rule: for projects to be economically feasible their IRR should exceed both the STPR and the social opportunity cost rate (SOCR). The long-standing social discount-rate dilemma is thus solved, for in fact there is no choice. Both rates must be used. An agent-based capital market model with multiple actors and two financial instruments, one of them stochastic, illustrates and provides additional insights.

Suggested Citation

  • Szekeres, Szabolcs, 2022. "Answering the social discount rate question," MPRA Paper 115848, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115848
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    References listed on IDEAS

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    Cited by:

    1. Szekeres, Szabolcs, 2023. "The simple answer to the Social Discount Rate question," MPRA Paper 117843, University Library of Munich, Germany.
    2. Szekeres, Szabolcs, 2023. "Opportunity Cost of Capital, Marginal Cost of Funds and Numeraires in Cost-Benefit Analysis," MPRA Paper 118725, University Library of Munich, Germany.
    3. repec:pra:mprapa:120058 is not listed on IDEAS
    4. Szekeres, Szabolcs, 2024. "Resolving the Discounting Dilemma," MPRA Paper 120014, University Library of Munich, Germany.

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    More about this item

    Keywords

    social discount rate; prescriptive discounting; descriptive discounting; two-rate discounting; declining discount rates; Ramsey rule;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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