The Social Discount Rate: A Baseline Approach by James Broughel :: SSRN

Economists discount future benefit and cost flows for a variety of reasons, including time preference, diminishing marginal utility of consumption, opportunity cost of capital, and risk aversion. Many of these rationales for discounting can be explained using the Ramsey equation found in neoclassical growth theory. This paper argues that Ramsey approaches to discounting are problematic for use in regulatory benefit-cost analysis (BCA) because they are inconsistent with certain foundational principles of BCA. A more useful discounting framework is one that is based on the time value of money, where discounting is used as a way to compare investment projects to a baseline alternative investment. A social discount rate (SDR) used in this manner avoids many ethics controversies that arise in Ramsey discounting approaches with respect to giving preferential treatment to the present generation over future generations, but it still recognizes and accounts for the importance of economic growth. An SDR of about 7 percent appears to be reasonable and is consistent with current guidelines from the Office of Management and Budget.

Source: The Social Discount Rate: A Baseline Approach by James Broughel :: SSRN

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