Intergenerational Discounting: A Case from Hong Kong

Habitat International, Vol. 32, No. 3, pp. 283-292

21 Pages Posted: 1 Apr 2009 Last revised: 12 Aug 2013

See all articles by Siu Kei Wong

Siu Kei Wong

University of Hong Kong

K.W. Chau

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics

Edward Chung Yim Yiu

University of Auckland Business School

M. K. W. Yu

Independent

Date Written: May 4, 2008

Abstract

In debating sustainable development issues such as climate changes and nuclear waste disposal, policymakers usually base their decisions on cost-and-benefit analysis (CBA), which evaluates tradeoffs between costs and benefits spanning over a century. Fundamental to this approach is the choice of an intergenerational discount rate for a society. Observable market rates, however, are mostly available up to 30 years only (e.g. U.S. bonds), which do not necessarily reflect the long-term discount rate for a society to deal with sustainable development. A number of studies have demonstrated that a small change in the discount rate can drastically alter the CBA's outcome. This paper seeks to unveil the market's intergenerational discount rate by analyzing a very "long-lived" and inheritable asset - land property. By examining a mix of lease tenures (50, 75, 99, and 999 years) and their transactions, we found that 999-year property commands a significant premium of 5.74% over 99-year property from 1992 through 2006. The premium implies an intergenerational discount rate of 4.31% p.a. on average, which is significantly lower than the intragenerational discount rate. The discount rate so unveiled would contribute to a more informed intergenerational decision analysis, such as evaluating the cost-effectiveness of environmental legislation and assessing very long-term pollution damages in court. The result also has important implications for real estate valuation practices in China, as all land in Mainland China and Hong Kong is leasehold.

Keywords: Sustainable development, discount rate, land value, land tenure

Suggested Citation

Wong, Siu Kei and Chau, Kwong Wing and Yiu, Edward Chung Yim and Yu, M. K. W., Intergenerational Discounting: A Case from Hong Kong (May 4, 2008). Habitat International, Vol. 32, No. 3, pp. 283-292, Available at SSRN: https://ssrn.com/abstract=1370756

Siu Kei Wong (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Kwong Wing Chau

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics ( email )

Ronald Coase Centre for Property Rights Research
Pokfulam Road
Hong Kong
Hong Kong
(852)28592128 (Phone)
(852)25599457 (Fax)

Edward Chung Yim Yiu

University of Auckland Business School ( email )

Sir Owen G Glenn Building
12 Grafton Road
Auckland, 1024
New Zealand
+64 923 3913 (Phone)

HOME PAGE: http://https://unidirectory.auckland.ac.nz/people/profile/edward-yiu

M. K. W. Yu

Independent

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