The Rate of Discount for Benefit-Cost Analysis and Theory of the Second Best

54 Pages Posted: 25 Aug 2000

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: July 1983

Abstract

In this paper I wish to present a way of thinking about what the rate of discount ought to be for evaluating projects within the public sector. The conclusion of my analysis is that there is not a convincing case that the social rate of time preference ought to be used. Nor is there a convincing case that the marginal rate of transformation in the private sector ought to be used. Neither of these rates is, in general, appropriate; indeed, the appropriate rate of discount may not even lie between the two.

Interest in the problems of benefit-cost analysis arises from the belief that in a variety of circumstances one does not want to use market prices for evaluating a project; implicitly, there is some market failure, which leads market prices not to reflect social evaluations. Thus, intrinsically, benefit-cost analysis is concerned with second-best situations. We assume, for one reason or the other, that the failure giving rise to a discrepancy between market prices and social evaluations cannot be attacked directly.

Suggested Citation

Stiglitz, Joseph E., The Rate of Discount for Benefit-Cost Analysis and Theory of the Second Best (July 1983). NBER Working Paper No. R0393. Available at SSRN: https://ssrn.com/abstract=240087

Joseph E. Stiglitz (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
370
Abstract Views
3,156
rank
79,695
PlumX Metrics