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Aggregate Social Discount Rate Derived from Individual Discount Rates

Author

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  • Kenneth F. Reinschmidt

    (Texas A&M University, Department of Civil Engineering, Construction, Geotechnical, and Structures Division, College Station, Texas 77843-3136)

Abstract

In the economic evaluation of large public-sector projects, an aggregate social discount rate may be used in present worth comparison of alternatives. This paper uses the assumptions that individual discount rates are constant over time and approximately Normally distributed across the affected population, with mean \mu and variance \sigma 2 , to derive an aggregate discount function that is exponential in form but with time-dependent aggregate discount rate \rho (t) = \mu - \sigma 2 t/2, where t is the time of occurrence of the cost or benefit. This equation agrees with numerical simulations. If \sigma 2 > 0, then the aggregate discount rate is less than the mean individual discount rate, and use of the time-dependent aggregate discount rate \rho (t) = \mu - \sigma 2 t/2 instead of the constant discount factor \rho (t) = \mu would result in larger discounted present values for public-sector projects for which the benefits lie far in the future. This could mean that public-sector investments that would be rejected under the assumption \rho (t) = \mu might be justified using the time-dependent aggregate discount rate \rho (t) = \mu - \sigma 2 t/2.

Suggested Citation

  • Kenneth F. Reinschmidt, 2002. "Aggregate Social Discount Rate Derived from Individual Discount Rates," Management Science, INFORMS, vol. 48(2), pages 307-312, February.
    • Handle: RePEc:inm:ormnsc:v:48:y:2002:i:2:p:307-312
    DOI: 10.1287/mnsc.48.2.307.259
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    References listed on IDEAS

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    1. Norman Henderson & Ian Langford, 1998. "Cross-Disciplinary Evidence for Hyperbolic Social Discount Rates," Management Science, INFORMS, vol. 44(11-Part-1), pages 1493-1500, November.
    2. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
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    Citations

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    Cited by:

    1. Changwoo Shon & Tae Ho Lee & Grace Ossak Ndombi & Eun Woo Nam, 2018. "A Cost-Benefit Analysis of the Official Development Assistance Project on Maternal and Child Health in Kwango, DR Congo," IJERPH, MDPI, vol. 15(7), pages 1-11, July.
    2. Elyès Jouini & Clotilde Napp, 2009. "Cognitive biases and the representative agent," Working Papers halshs-00488570, HAL.
    3. Diego Nocetti & Elyès Jouini & Clotilde Napp, 2008. "Properties of the Social Discount Rate in a Benthamite Framework with Heterogeneous Degrees of Impatience," Management Science, INFORMS, vol. 54(10), pages 1822-1826, October.
    4. Muhammad Yasir, 2015. "Investigating the Real Shocks in the Discount Rate of Pakistan," South Asian Journal of Management Sciences (SAJMS), Iqra University, Iqra University, vol. 9(1), pages 10-14, Spring.
    5. repec:dau:papers:123456789/2319 is not listed on IDEAS
    6. Elyès Jouini & Clotilde Napp, 2008. "Aggregation of Discount Rates: an Equilibrium Approach," Working Papers halshs-00394035, HAL.
    7. Jouini, Elyès & Napp, Clotilde, 2014. "How to aggregate experts' discount rates: An equilibrium approach," Economic Modelling, Elsevier, vol. 36(C), pages 235-243.
    8. Elyès Jouini & Clotilde Napp, 2012. "Behavioral biases and the representative agent," Theory and Decision, Springer, vol. 73(1), pages 97-123, July.
    9. Rao Ramesh K. S. & Stevens Eric C, 2006. "The Firm's Cost of Capital, Its Effective Marginal Tax Rate, and the Value of the Government's Tax Claim," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-57, January.
    10. repec:dau:papers:123456789/4987 is not listed on IDEAS
    11. Jouini, Elyès & Marin, Jean-Michel & Napp, Clotilde, 2010. "Discounting and divergence of opinion," Journal of Economic Theory, Elsevier, vol. 145(2), pages 830-859, March.
    12. Dorje C. Brody & Lane P. Hughston, 2018. "Social Discounting And The Long Rate Of Interest," Mathematical Finance, Wiley Blackwell, vol. 28(1), pages 306-334, January.
    13. repec:dau:papers:123456789/6511 is not listed on IDEAS
    14. Dorje C. Brody & Lane P. Hughston, 2013. "Social Discounting and the Long Rate of Interest," Papers 1306.5145, arXiv.org, revised Sep 2015.

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