Discounting Disentangled

42 Pages Posted: 9 Jun 2015 Last revised: 29 Nov 2015

See all articles by Moritz A. Drupp

Moritz A. Drupp

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Mark Freeman

Loughborough University

Ben Groom

London School of Economics & Political Science (LSE)

Frikk Nesje

University of Copenhagen - Department of Economics

Date Written: November 28, 2015

Abstract

As the most important driver of long-term project evaluation, from climate change policy to infrastructure investments, the social discount rate (SDR) has been subject to heated debate among economists. To uncover the extent and sources of disagreement, we report the results of a survey of over 200 experts that disentangles the long-term SDR into its component parts: the pure rate of time preference, the wealth effect, and the real risk-free interest rate. The mean recommended SDR is 2.27 percent, with a range from 0 to 10 percent. Despite disagreement on point values, more than three-quarters of experts are comfortable with the median SDR of 2 percent, and over 90 percent find an SDR in the range of 1 to 3 percent acceptable. Our disentangled data reveal that only a minority of responses are consistent with the Ramsey Rule, the theoretical framework dominating discounting policy. Instead, experts recommend that governmental discounting guidance should be updated to deal with uncertainty, relative prices, and alternative ethical approaches.

Keywords: Social discount rate, expert advice, project evaluation, disagreement

JEL Classification: H43, D61, Q58

Suggested Citation

Drupp, Moritz A. and Freeman, Mark and Groom, Ben and Nesje, Frikk, Discounting Disentangled (November 28, 2015). Available at SSRN: https://ssrn.com/abstract=2616220 or http://dx.doi.org/10.2139/ssrn.2616220

Moritz A. Drupp (Contact Author)

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Mark Freeman

Loughborough University ( email )

Ashby Road
Loughborough, LE11 3TU
Great Britain
+44-1509-223107 (Phone)

HOME PAGE: http://www.lboro.ac.uk/departments/sbe/staff/profiles/freemanmark/freeman-mark-.html

Ben Groom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Frikk Nesje

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

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